The automotive industry remains to be one of the largest industries globally. This is no exception to India’s automotive industry that is ranked as the sixth largest in the world and is expected to continue growing. With its manufacturing capacity of about 11 million automobiles and exporting approximately 1.5 million of them, India’s automobile industry plays a crucial role in the country’s transport landscape and economic growth. The accelerated growth of the industry has been largely owed to government effort to create favorable conditions for Foreign investment, the cost effective and skill labor as well as the growth of per capita disposable income among India’s population of 100 million people; a population whose growth is about 1.2 percent per annum(Shegokar, 2017). However such favorable market condition has led to many of the global automobile players to venture into the market increasing the competitiveness of the automobile industry in the country. Despite this there is room for continued growth and with India strategic geographical position, it can serve as an assembly and manufacturing for firms willing to venture into the Industry. This essay seeks to analyze India’s automobile industry and future trends of the industry with regard to firms that may wish to venture in the industry.
India’s automotive industry has overtime become one of the largest industries globally whose annual production was estimates at 21.48 million vehicles by the end of 2014 financial year. According to Shegokar (2016) India’s auto industry, is the largest market for three wheel automobiles with a share of about 75%, second largest for two wheelers at 9 %, the 10 largest for passenger vehicles at 16 % market share and fifth in buses and trucks at 9 % worldwide. As of 2012 the industry’s turnover was estimated to gross over USD 354 billion and employing about 13 million people directly and indirectly. In India, the automobile industry is a major player in propelling the growth of India’s economy, where it accounts for 22 percent of the country’s gross domestic product (GDP) (KPMG, 2006).
India’s automotive industry has come a long way since the 1980’s when the market was restricted to outside players and the production of outdated model among the 5 players in the industry. Over the years the industry has witnessed resurgence owing to the de-licensing and deregulation of the industry and the liberalization of the market in 1993. The move has encouraged a lot of investment in the industry including over USD 12.3 billion in FDI from 1993 to 2015. In turn the industry has seen tremendous growth as it production of vehicles grew to about 110 million by 2011 compared to the 2 million vehicles produced by 1991. Currently most of the major industry players in the Globe have set up manufacturing facilities in India as the demand for luxury medium and small automobiles continues to grow with the country’s economic growth (KPMG, 2010). Notably, despite a slow-down in growth during the recession in 2008 to 2011, India was one of a few automotive industries that witnessed a positive growth.
India industry has an estimated worth of 24,000 crores 65 percent of the total market being attributed to two-wheeler vehicles while, 19 percent to passenger vehicles 3 percent to commercial vehicles while 11 percent market share is comprised of three-wheeler vehicles. The market share is also poised to grow with the economy of Indian experiencing a growth rate of 7.1 annually(Bhatia, 2016). There have been a variety of global players entering the Indian market However locally established Maruti India and Tata motors dominate in their respective specialty field which are passenger cars and leight vommercial vehicles.
The Porter’s five force model is an important model for conducting the conduciveness of a market especially for companies wishing to invest in the market. The Porter's five Forces model is centered on five aspects that influence a market and its health which include: Threats to new entrants, the bargaining power of customers, the existing threat of a substitute product, the suppliers bargaining power, and the level of competition within the industry.
The threat to new entrants is posed by more companies venturing into an industry and curving out a market share of the currently existing companies. New entrants thereby exert prices and cost pressures as well as investments needed to compete for the market share (Bhatia, 2016). However the threat to new entrants is barred by the amount of resistance presented from existing players that may deter the new entrants from venturing. The factors include:
Notably the automotive industry requires a substantial amount of investment to setup manufacturing facilities and market research among others. The attractiveness of the Indian market has led to entry of international players such as Renault, Nissan,and Volkswagen among others who have a strong capital base to invest a healthy market. While the local players such as Maruti and Tata still retain a large market share, the new technological base of new entrants has allowed such firms to gain a footing in the Indian market(Bhatia, 2016). Therefore threat from new entrants can be deduced to be high.
Factors such as raw materials, distribution chains and technological accessibility are vital requirement of the automotive industry. In India, these factors are not easily accessible. Steel is mostly imported from China thus addition to expenses while policies such as capping fuel emission, price of fuel could impede on final net profit (Mohile, 2016). Technological advancement is changing frequently and its penetration in Indian automotive industry has been medium but steady (KPMG, 2017). This also creates a high threat to new entrants that may find more efficient technology that may disrupt the traditional market.
Due to the high value of the automobile sector to India’s economy, the government has developed favorable conditions that have attracted huge investments to the industry. These include de-licensing and liberalization of the market where government allows 100 percent Foreign Direct Investment(Bhatia, 2016). The government has also worked to ease of doing business while also introducing favorable rating for fuel efficiency automobiles to encourage purchases.
Popularity of a Brand and differentiation of product serve as deterrent to new entrants. India, exclusive luxury car brands and industry trend setter have been able to curve out a market for themselves due to high brand image globally and the brand equity value associate to the brand. Trend setters capitalize on the high switch cost of Automobile(Bhatia, 2016). However in a bid to penetrate the market company acquisition and mergers are a common entry strategy to penetrate the market. For instance, Maruti India a leader in Commercial vehicle production acquired Land Rover and Jaguar to curve out a market share of the luxury automotive industry.
The bargaining power of India’s supplier is moderate based on the large number of suppliers of automotive parts and the high switch costs to other suppliers outside the country. With 500 main manufacturers and over 5000 suppliers in the unorganized industry sector, the suppliers sector is populate but equally have a superior advantage of accessibility to supply manufacturers. Local suppliers enjoy lower rates of imports through bilateral free trade agreements with India and trade allies such a tax reliefs and duty free imports sourcing; a privilege not extended to outside supplier thus giving local suppliers a competitive edge. In such a case manufacturers have high supplier switching cost making it cost effective to source raw materials locally (Singh, Garg & Sharma, 2010). However, where high technological capability of producing parts is unavailable locally, manufacturers have no choice but to incur higher cost for quality value, leaving the bargaining power of local traders low, with regards to particular raw material.
Buyer bargaining power depends on the number of willing buyers within an industry factored in with the availability of substitute product and cost of switch to another product as well as the ability of consumer to meet the price value for quality provided. India’s automobile consumption has grown steady in the last decade and is expected to continue rising. With an increase in the middle class’s disposable income due to soaring economic growth and population growth, as well as the cross-effect growth of automobile industry on other sectors, the industry register growth in coming years(Kumaraswamy et al., 2012). Currently, commercial vehicle high demand potential owing to the high cost of substitute transportation such as airplane. However bad roads and high fuel cost may increase the cost of operating commercial vehicle making the marketing unfavorable, but the government has made efforts to increase and maintain road networks and also promote fuel efficient automotive technology. In personal comfort and households affordability of personal automobile has promoted all segments of the auto industry. In fact other modes of transportation i.e. rail and air transport account for 10 percent of the total transport revenue while 90 percent share goes to automobiles (Luthra et al., 2017). The factors contribute to market growth hence favorable for companies operating in the sector.
Despite the continued growth of the auto industry in India, there exists high competitiveness due to the rise in number of players that have entered the market since its de-licensing and consequent liberalization. Notably the competitiveness and low product switch cost help in minimizing price-based competition but in a bid to maximize on profits and curve out a larger market share, companies are digressing into the variety of products and competing on differentiation to raise competitive edge(Gupta, Gupta & Maheshwari, 2017). However the growth on demand for automobiles is yet to be matched by supply thus making the market conducive for proactive competition. For instance the development of fuel efficient cars, technologically advanced cars and small cars by a number of players leaves little room of a monopolistic domination of any given automobile segment. Tata currently dominate the Light commercial Vehicle pool with an estimated market share of 64 percent while Maruti Suzuki India dominates passenger cars sector with a 46 percent market share. Hero Honda is the leader in the two-wheeler production with a market share of about 41 percent.
The future of automobile industry is expected to continue growing with reference to the growing demand for its products and the growing market base in rural and urban markets in India. The current government is expected to pay increased attention on reforms and policies that will favor the automobile industry such expenditure on developing integrated infrastructure. The growth in the economy coupled with an increased infrastructural development harbor a favorable future for the industry (EY, 2016). Additionally an increase in diesel prices to almost the same price as petrol is expected to further level the playing field for utility vehicles and passenger cars as it influences the consumer purchasing decision.
Notably the expected growth in the two-wheeler market companies in this sector as set benefit. Additionally, competitive pressures from sector players will play a vital role in retain status quo price margins in the industry sector(Kumar, 2008). It is also expected that the three-wheeler industry will experience substantial growth as exports are expected to grow with demand of this vehicles in emerging markets such as Africa and also India’s rural areas.
In recent years the government has work to increase the popularity of mechanized farming over traditional labor farming. Such a move could present positive long-term prospects for the Tractor production sector. With government’s focus on rural infrastructure, the tractor industry sector is expected to grow.
India has invested heavily in the education sector thus enhancing the number of skilled labor available in the country. A wider pool of skilled labor such as engineers may lead to innovations among industry player and technological expertise at a relatively cheaper cost of labor that arises with an increase in skill labor. Some companies are working on developing electric car which may disrupt the traditional fuel market (YES Bank,2013). However, mainstream production of such vehicles is many years away from perfection and developing affordable electric cars.
India’s Automobile Industry is steadily growing and in good competitive health. Since the liberalization of the market, the industry has experience a resurgence that not only promotes technological advancement in the sector but also quality competitiveness that is favorable to consumers. Increased government support of the sector and the increased per capita disposable income is also poised to that favor the sector. One finds in evaluation of Michael Porter’s Five Forces model, India’s market is favorable for new entrants whose could acquire or Merge with existing companies as a way of getting into the market. While Suppliers bargaining is moderate, is advantageous for manufacturers whose production raw material is sourced locally. Buyers bargaining power is high thus impeding on auto manufacturers profit margins. However, with the ever increasing demand for automotive products and consequent market growth, healthy competition is expected to ensue especially among the two wheeler auto-sector. One negative aspect of the Indian market is the need for heavy capital investment required to venture into the industry. However, the strengthening and accessibility of financial institutions may allow for affordable financial be beneficial to industry entrants.
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