Indian Automobiles:opportunities and Challenges

Executive Summary: The Indian automobile industry is currently experiencing an unprecedented

boom in demand for all types of vehicles. This boom has been triggered primarily by two factors:

(1) increase in disposable incomes and standards of living of middle class Indian families estimated

to be as many as four million in number; and (2) the Indian government's liberalization measures

such as relaxation of the foreign exchange and equity regulations, reduction of tariffs on imports,

and banking liberalization that has fueled financing-driven purchases. Industry observers predict

that passenger vehicle sales will triple in five years to about one million, and as the market grows

and customer's purchasing abilities rise, there will be greater demand for higher-end models which

currently constitute only a tiny fraction of the market. These trends have encouraged many multinational

automakers from Japan, U. S. A., and Europe to enter the Indian market mainly through

joint ventures with Indian firms. This paper presents an introduction to the key players in the

Indian automotive industry, a summary of the recent developments, and an analysis of the

opportunities and challenges facing the various players (Indian and multi-national assemblers and

component makers) in the areas of product development, production, and distribution.

1.1 Introduction to The Indian Automotive Industry

For forty years since India's independence from the British in 1947, the Indian car market was

dominated by two localized versions of ancient European designs -- the Morris Oxford, known as

the Ambassador, and a old Fiat. This lack of product activity in the Indian market was mainly due

to the Indian government's complex regulatory system that effectively banned foreign-owned

operations. Within this system (referred to informally as the "license raj"), any Indian firm that

wanted to import technology or products needed a license/permit from the government. The

difficulty of getting these licenses stifled automobile and component imports, creating a low

volume high cost car industry that was inefficient, unprofitable, and technologically obsolete. The

two dominant products Ambassador and Fiat, although customized to the poor road conditions in

India, were based on a stale design concept (with outdated features), and were also fuel inefficient.

In the early 1980's, the Indian government made limited attempts at reforming the automotive

industry, and entered into a joint venture with Suzuki of Japan. The joint-venture, called Maruti

Udyog Limited, launched a small but fuel efficient model (called "Maruti 100"). Priced at about

$5,500, the product became an instant hit. The joint venture now produces three small-car models,

a van, and a utility vehicle at a rate of more than 250,000 a year. Despite being a late entrant,

Maruti's vehicles are estimated to account for as much as 70 per cent of India's car population.

In 1991, a newly elected Indian government took over and faced with a balance-of-payments crisis

initiated a series of economic liberalization measures designed to open the Indian economy to

foreign investment and trade. These new measures effectively dismantled the license raj which had

made it difficult for Indian firms to import machinery and know-how, and had disallowed equity

ownerships by foreign firms. In 1993, the government followed up its liberalization measures with

Page 2

significant reductions in the import duty on automobile components. These measures have spurred

the