Passenger cars: Transition underway - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Passenger cars: Transition underway

Oct 6, 2001

Starting from the good old days of Ambassadors' and Premier Padminis' to fifth generation Accords’, the Indian passenger car segment has come a long way. In this article, we look at some crucial aspects of the industry and its growth potential. If one were to look at the Indian passenger car segment, Maruti Suzuki (the joint venture company between Indian government and Suzuki of Japan) dominates the Indian scene. Maruti had a commanding 58% market share in FY01 followed by Hyundai, which has a 15% market share. Hyundai entered into the Indian market barely two years ago and came as a breath of fresh air to the small car segment, hitherto dominated by Maruti. Telco, which recently forayed into this segment, has an 8% market share.

The passenger car segment can be broadly divided into four sub-categories. Segment-A consists of Maruti 800 and Ambassador, Segment-B include Zen, Hyundai Santro and Tata Indica, Segment-C has the likes of Hyundai Accent, Honda City & Mitsubishi Lancer and Segment-D i.e. the premium segment that is dominated by Mercedes.

The new players are concentrating on the ‘B’, ‘C’ and ‘D’ segments. Hyundai, Honda, Mitsubishi, Mercedes and Fiat have all launched models addressing the aforesaid segments. The reasons are multifold. One is the dominant presence of Maruti 800 in the ‘A’ segment. Hyundai, Telco and Daewoo launched models in the ‘B’ segment in an effort to upgrade the ‘A’ segment buyers.

Budget 2002 also had something for auto majors to cheer about. The withdrawal of special excise duty (8%) has lowered excise duty on scooters, motorcycles and passenger cars (excise duty on passenger cars was reduced from 40% to 32%). Though auto companies passed on the benefit to the consumers initially, prices were raised across the board towards the end of 1QFY02 (remember, auto companies had heavily invested in complying with emission norms last year).

In an effort to increase foreign participation in the country, the foreign direct investment limits have been raised to 100% through automatic approvals compared to 74% currently. The minimum foreign equity rules have also been relaxed. From US$ 250 m minimum foreign equity requirement for cars/MUVs, the new limit has come down to US$ 100 m. This is expected to benefit the small-scale manufacturers who cannot afford technology to upgrade manufacturing facilities. A typical example could be the auto ancillary segment. With globalisation setting across the automobile segment and consolidation being the key in the auto ancillary segment, the supplier base is likely to be divided into three categories. Category one vendors (for OEMs) would outsource a key portion of their requirements from the category two and category three vendors. The category one player will infuse capital and supply technology to the smaller players. Thus both the players would gain from higher efficiency.

The FY07 household scenario...
(m) Rural Urban Total
Very rich 1.6 4.5 6.1
Consuming class 47.3 43.6 90.9
Climbers 63.3 10.7 74.0
Aspirants 14.7 0.7 15.4
Destitutes 12.2 0.5 12.7
Total 139 60 199.1
Source: NCAER

The recent report on households in India by the National Council for Applied Economic Research throws some interesting facts. First let us look at the 1994-95 scenario. The very rich households as a percentage of total households stood at 0.6% and the consuming class, the key section of the population, as a percentage of total households stood at 17.4%. But NCAER expects a drastic change in the population pattern in the coming years. The consuming class as a percentage of total households is expected to touch 45% by FY07. Given the current penetration levels of passenger cars and utility vehicles, going forward, one can expect a sharp rise in demand. Utility vehicles (UVs), which hitherto were looked upon just as a transportation vehicle, are being increasing preferred by middle class families. Given this backdrop, the Indian automobile sector is poised to move into higher growth trajectory in coming years.

Changing dynamics...
(% of total) FY95 FY07
Very rich 0.6% 3.1%
Consuming class 17.4% 45.7%
Climbers 29.2% 37.2%
Aspirants 24.9% 7.7%
Destitutes 27.9% 6.4%
Total 100.0% 100.0%
Source: NCAER

However, the need for the hour is to boost growth of the economy. We have been growing at Hindu growth rate for nearly three years now. The road development program initiated by the Prime Minister is a step in the right direction. We need more of such measures if India has to emerge as an economic powerhouse of Asia. Even Mr. Ratan Tata, the Chairman of Tata Engineering, vouches for this. However, merely initiating programs is not enough, the government should bite the bullet to implement them.

With QR restrictions being lifted with effect from April 2001, government has given a go-ahead for import of second hand vehicles. However, the import duty on such cars was set at 105% (3 times the peak rate of 35%), for which the effective duty works out to over 180%. This has forced multinationals companies to rethink their import strategy. Increasingly companies are planning to import vehicles through semi-knocked down (CKD) route for which customs duty currently stands at 35%.

It is apparent that though the pace is slow, change is taking place. Domestic companies would have to fight a tough battle going forward in order to keep their shares from eroding. However, for Indian consumers, the ride has only just begun.

Equitymaster requests your view! Post a comment on "Passenger cars: Transition underway". Click here!


More Views on News

Tata Motors' Stock in Focus as Company Meets Global Investors (Views On News)

Jun 8, 2021

Tata Motors' meeting with marquee investors comes on the back of poor earnings.

Mahindra & Mahindra Shares Surge on Bagging Contract for Defense Equipment (Views On News)

Jun 4, 2021

Mahindra & Mahindra has signed a contract with the Ministry of Defence.

Eicher Motors in Focus as Company Reports Record High Revenues (Views On News)

May 28, 2021

Despite the sharp rise in raw material costs, the company managed to grow its operating profit by 47%.

Auto Sales Dampened in the Month of May. Will it Bounce Back? (Views On News)

Jun 2, 2021

Auto Industry's recovery slows in May due to the second covid wave.

JK Tyre and Industries Stock Jumps on Strong Operational Performance (Views On News)

May 20, 2021

Here's a rundown on the latest quarterly results of JK Tyre and Industries.

More Views on News

Most Popular

Hotel Stocks Will Reward Investors (Fast Profits Daily)

Jun 8, 2021

This is why I'm bullish on the hotel and hospitality sector.

My 'Unlock' Investments (Fast Profits Daily)

Jun 11, 2021

The best unlock investments you can make in the market.

How I Discovered a 400-Year-Old Open Secret to Extreme Wealth (Profit Hunter)

Jun 11, 2021

Charlie Munger's open secret about investing success.

The Most Visible Sign of India's Revival is on Two Wheels (Profit Hunter)

Jun 9, 2021

Investing in the best stocks could result in wealth compounding on a massive scale.


India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms


Jun 18, 2021 (Close)