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Over-capacity fear looms large over car segment - Views on News from Equitymaster
 
 
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  • Sep 25, 1999

    Over-capacity fear looms large over car segment

    An eye-opening study conducted by the Association of Indian Automobile Manufacturers (AIAM) reveals that the passenger car segment is likely to be faced with excess capacity from FY2000. The details of the study were reported by a business daily.

    The study reveals that by FY2000, thirteen companies will be operating in the car segment at a combined capacity of 1.3 m cars. However, demand will be much lower at 500,000-700,000 m cars, implying that around half the capacity will be idle.

    By projecting optimistic demand estimates, most international car manufacturers have made a beeline for setting up operations in the country. Just about every car major has a presence in the country either through a wholly owned subsidiary (General Motors, Fiat), or through joint ventures (Daimler Benz, Ford).

    Currently, cumulative investments made by all car companies amounts to Rs 125 bn. In addition to this, auto ancillary manufacturers have invested Rs 40-50 bn. At the current level of volumes, most car companies will take more than 10 years to break-even. Existing volumes in the country do not justify the high levels of capital expenditures that have been undertaken. Moreover, the companies will continue to bear interest cost to service their loans.

    As current level of domestic demand is very low, companies will have to tap the export market to utilise their idle capacities. Already some companies like GM, Daewoo and Fiat, in anticipation of such a scenario, have made India their global sourcing base. Other companies will also have to undertake similar measures. In the short term car companies will have to focus on volumes in order to break-even.

     

     

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