India: The global small car hub

When Maruti Udyog Managing Director Jagdish Khattar announced at the eight Auto Expo on Thursday that his company will invest Rs 2,718 crore by 2007-08 to develop new cars, the country took another firm step towards becoming a global production hub for small cars.

With the government working on a favourable tax regime for small cars -- Finance Minister P Chidambaram talked about the need for special incentives for small cars in September -- global automobile majors are investing thousands of crores to make India a global production base for small cars.

Suzuki Motor Corporation, which owns 54.2 per cent of Maruti, leads the pack. Suzuki is the leading player in the Japanese small car market and is putting its money on India to ward off any competition.

The investment announced by Khattar is in addition to the Rs 3,200 crore the company is investing in a new car plant and a diesel engine facility. Of the five cars that Maruti plans to launch in the next five years, insiders say, at least three may be small.

Hyundai, which posed the first challenge to Maruti's hegemony over small cars in India way back in 1998, has already made the country a manufacturing hub of sorts -- India is the only country in which Hyundai's Santro is manufactured. And this is the reason why Hyundai is the biggest exporter of cars from India.

Toyota also has been working on a small car project, reportedly in collaboration with its subsidiary, Daihatsu, which is known for its small car capability. However, it could also be based on Toyota's own Yaris, a hot selling model in Europe.

More is in the pipeline, thanks to Mahindra & Mahindra's tie-up with Renault of France. And VolksWagen, too, is knocking on the doors. Fiat is planning to revisit its small car strategy for India with the Grade Punto. All three are volume players in Europe and have small car capabilities.

"India has fortunately developed the capability in manufacture of small cars. We are better at cost control than anyone, anywhere in the world," Khattar told Business Standard.

India can boast of world-class capabilities in the production of small cars owing to its strong domestic market. Of the 800,000 cars sold in the country in 2005, 600,000 were small cars of engine capacity up to 1,300 cc.

And the market could just explode if Tata Motors succeeds in bringing out its Rs 1-lakh car.

Other small car hotspots of the world are Japan, whose small car market is about 1.5 million, and Brazil, which sells 700,000-800,000 small cars. All of Europe sells about 500,000 small cars.

Then, there are the cost benefits of producing in India. Privately, several automobile multinationals admit that they can produce cars in India at a third of the cost in the US because of the high cost of labour there.

Also, the Indian components industry is more evolved than many other global production centres. Most small cars in the country are highly indigenous. Tata Motors, built its small car, the Indica, from scratch with locally produced parts.

To India's advantage, China -- driven by institutional buying -- has become predominantly a big sedan market. Only recently, the Chinese government has started pushing for small affordable cars for individuals and easy finance schemes.