An Overview of Automobile Industry - Part 1

Automobile industry is an essential driver of growth in any given economy and plays a vital role in the overall national development. It provides for the requirement of basic industries like steel, non-ferrous metals, fertilizers, refineries, petrochemicals, logistics etc. The automotive industry includes automobile along with the spare parts of the same.

The Automobile industry in India commenced operations in the 1940s. Automobiles were then considered to be a product which only the rich could afford. The production process was licensed and expansion of the market seemed a difficult phenomenon to achieve. After the economic reforms in 1991, this sector was recognized as the Sunrise industry of the Indian economy as it saw exponential growth due to de-licensing of manufacturing and opportunities which got opened post globalization.

There are various segments in the automobile industry including passenger vehicles (passenger cars, utility vehicles, multi-purpose vehicles), commercial vehicles (light commercial vehicles and medium & heavy commercial vehicles), two-wheeler (mopeds, scooters, and motorcycles), and three-wheeler (passenger carrier or goods carrier). In terms of domestic market, two-wheeler account for about 80% of the total market share, passenger vehicles come next with about 13%, and followed by commercial segment having 4% share and then comes three-wheeler having about 3% of the total market

In FY 2019, a total of more than 3 crore vehicles were produced in India and presently it is:

• the 4th largest automobile player in the world
• the world’s largest two-wheeler manufacturer
• the world’s largest market for three-wheeler
• the fifth largest commercial vehicle manufacturer in the world

Various Key Performance Indicators for the industry include the number of vehicles sold, carbon emission per unit, and financial measures like EBITDA, Net Profit, Inventory Turnover Ratio, EPS, Total Debt, Net Cash from operations, Net Debt to Equity ratio etc.

Growth Boosters –

Growing economy and growing demand:
With the economy's growth and development, the middle class has been growing and has given an impetus to the sector. This is further accentuated by increasing in the country’s population. Not only domestically, but India is also faring well in the international arena with it becoming the hub for exports of automobiles. it is the 4th largest automobile player in the world. India plants have an actual cost advantage as they incur about 25% less costs as compared to their American and European counterparts. There has been a cumulative FDI of about USD 20 Billion across the sector. The GOI expects the automotive sector to attract USD 8-10 Billion by using local and foreign investments by 2023.

Policy Support:
Different policies from the government is helping the sector to grow further. One of the biggest policies is the Automotive Mission Plan of 2026. The government in coordination with the Automobile industry has set a vision which pertains to India becoming the 3rd largest Automotive player in the world, increase the industry’s contribution to GDP to 12% from the present 7% and also to create about 65 million more jobs. These goals are set to be met by 2026 which implies a targeted CAGR of 15% with the industry quadrupling itself between 2016 to 2026.
Along with this, another major initiative is in the form of Faster Adoption and Manufacturing of Electric Vehicles (FAME) India Policy which is aimed at smoothing the transition from the fuel-based model of vehicles to electricity powered vehicles. The GOI has shortlisted 11 cities across India with a population of over a million and will provide 105 Cr grant for buying electric vehicles, and for setting up a proper infrastructure for Electric vehicles. Measures like these provide various avenues for the existing players to enter and grow in a booming sector.

Yet another policy is the End of Life (EoL) Policy which is anticipated to come out in the near future and is aimed at reducing pollution. Through this, the government will be pushing for scrapping the vehicles which have completed their life in different scrapping centers. It is like an augmentation of the Inspection and Certification (I&C) under which every single vehicle will be issued a certificate with respect to its road worthiness and any unfit vehicle will not be allowed on the road. This policy may disrupt in the industry for a short time but will prove to be beneficial in the longer run.

Under National Automotive testing and R&D infrastructure Project (NATRiP), 5 testing and research centers have been established since 2015. This policy is aimed at setting up of R&D centers at a total cost of USD 389 million to enable Indian industry to meet Global standards and hence make Indian products globally competitive.

Disruptors –

Shift to BS-VI: The government is also targeting to reduce the time slack between the introduction of emission norms across the world and in India from the current period of 7-8 years to a period of just 4 years. To achieve this, India has decided to jump directly from the BS-IV norms to the BS-VI norms by April 2020. Bharat Stage-VI is equivalent to the Euro-VI emission norms. This would mean that the new vehicles sold from 2020 will be having engines compliant with the new benchmark. This would lead to better efficiency but would be difficult for the producers as it would entail more expenditure as the industry is now investing upwards of Rs 70,000 crore to comply with BS VI. Meeting the deadline may also turn out to be problematic for the manufacturers. The BS-VI norms will make India and Europe similar in terms of standards followed. However, stark differences in the per capita income between two regions may present hurdles in the adoption of the new standards.

Push towards Shared Mobility – People now are preferring options of shared mobility over owning a vehicle themselves. This is having a negative effect on the industry as the number of users per car is increasing and this reduces the overall demand of automobiles in the market. However, this will also lead to a little positive impact in the form of increased frequency with which the vehicles used in the shared mobility will get replaced due to wear and tear resulting out of usage.

The advent of Autonomous and Connected cars also is a potential disruptor for the industry. Although the impact is rather limited in India as of now but with the passage of time, it is only going to intensify further. The manufacturers will have to be quick to adapt to the latest technologies in order to stay competitive in the global and domestic markets alike.
Having discussed the overview of the automobile industry along with its growth boosters and various disruptors, we will, in the next series, talk about the recent trajectory, and the status quo of the sector, and will try to forecast what the future likely holds for the industry.
 
REFERENCES: CRISIL, Sector Report by Mckinsey and PWC, IBEF Report, Economic Times, Live Mint, Forbes India, The Hindu Business Line, Seeking Alpha