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:
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.
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.
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
Image Source: Google Images
According to Investopedia: “Fast-moving consumer goods are products that sell quickly at relatively low cost. These goods are also called consumer packaged goods.” In other words, the FMCG Industry consists of Goods which have relatively low shelf life, lower price and are consumed and purchased frequently. FMCG Industry Globally is estimated to be a $10,020 Billion Industry (According to PR Newswire). The Industry is predicted to reach $15,361.8 Billions by the year 2025 with a CAGR of 5.4%. FMCG Industry in India is a $ 52.75 Billion Industry. The industry grew from a $31.6 Billion Industry in 2011 to a $52.75 Billion Industry in 2017-18 (As per Emami Ltd. Annual Report 2019). The growth of the top 15 FMCG companies such as HUL, ITC, Nestle and Marico etc. grew at a CAGR of 13.6% in the last 7 quarters. The industry is divided into 3 segments namely Food and Beverages, Healthcare and Household and Personal Care. They have a market share of 19%, 31% and 50% respectively. FMCG industry is considered a defensive industry logic being people cannot postpone the Consumption of Goods like in the case of Durables.
Overall, Urban Sector accounts for 55% of the market and Rural Sector accounts for the remaining 45%. The growth in the rural market in the past has been greater than that of the urban market to the tune of 1.5X. The Rural Market is expected to grow at 15-16% whereas for the Urban Market the same is 8%. The market is very fragmented with over 90% of the sales coming from the General Trade and the rest from Modern Trade. E-commerce is one of the emerging segments but it caters to a very small share of the market.
A lot of factors have contributed to the growth in this industry. Such as:
The Millennial Effect: It is the change in the consumption habits of the populace which is observed due to a shift in the spending population from Boomers to Millennials. According to a study by Accenture, the consumer of the future generation is becoming more price-sensitive, less brand loyal and more experience-oriented. In the same study, it was proved that millennials are more likely to switch between physical and online store. What this essentially applies is that the consumer wants to buy premium product i.e. the experience, but he/she is willing to switch to another product if it's available at a cheaper price. The same is witnessed in the Indian Context by a report by HDFC Bank Investment Advisory Group, the share of the premium product increased by 5% and those of mid product by 1% and that of lower strata product fell by 6%. From the company’s perspective, this essentially means that they have to now think of selling experience in the General Trade (which accounts for over 90% of the retail).
High Logistics Cost in India: One more challenge faced by the FMCG industry is the high logistics cost in India in comparison to other countries. India has a cost of around 13-14% of the sales whereas it is around 8% for the developed countries. Goods and Service Tax was a step in the right direction, because of GST there was a direct impact on how these companies managed their warehouses. Earlier, they used to have small warehouses in almost every major state to minimize the exposure to the Cross-Border Tax. But after the advent of GST, these taxes were abolished and an origin-based taxation system was introduced. As a result, they were able to use few large warehouses instead of various small warehouses and attain the benefit of economies of scale. But still, we are far from the optimal level of logistics cost.
E-Commerce A boon or Bane?: One of the key parameters of success for an FMCG company is the strength of the distribution network. With the advent of E-commerce, the same distribution network is now made available to a new entrant which might have taken Crores of Rupees before. This has made the industry more competitive. Although, there are various other positive externalities such as:
Trends to watch out
Male grooming has been one of the emerging segments in the industry given the increasing stress on personal hygiene combined with the increase in disposable income. One more segment in a market which is already the next battlefield for growth for the industry i.e. the Rural Market to watch is the Household and Personal Care. The reason? With the increased government initiatives such as Swatch Bharat Abhiyan and Beti Bachao Beti Padhao Andolan, there has been an increasing awareness about the positive externalities of maintaining good personal hygiene as well as keeping the surrounding clean. Given this increased awareness, the populace is more likely to seek out products that augment the same.
As the new generation is getting more health conscious there has been an increasing demand for healthy products be it Baked Snacks (Mondelez the snacking giant recently showed their interest to enter this vertical be it organically or inorganically) to healthier alternative to Carbonated Drinks.
There are various hurdles that are still needed to be tackled but Government is on its way to address them bit by bit. They have already taken a vow to bring down the logistics cost to sub 10% level. Various Companies such as Udaan, Amazon, Metro Cash and Carry and other E-Commerce Player are already pushing the whole framework towards formalization. On the other hand, FMCG Giants are doing their best to determine where the taste of future generations and lies and are trying to manufacture product that caters to those emerging needs. But in the recent times, the consumer spending has fallen for the first time in 40 years in India. The same can be seen via fall in sales of the FMCG giants in the Rural and Tier 1&2 cities. The time frame for which the recession may last is an issue for another blog, but one thing is clear. The FMCG industry still has a lot of potential in India and growth will come from the untapped market.
References: Cision PR NewsWire, Emami Annual Report, HDFC Bank Investment Advisory Group Sector Update, Sector Report by Accenture Strategy, HUL Investor Presentation, Investopedia, IBEF Report, EconomicTimes and Live Mint.