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Indian reforms boon for car buyers, bust for producers

Robin Elsham

It's Saturday afternoon and Pradeep Kumar -- a first-time car buyer -- is behind the wheel of a Hyundai Santro LS at the Jayabharat auto showroom in Bombay.

On the passenger seat beside the 32-year-old stock analyst is a copy of India Autobiz, which shows average selling prices for all 26 car models now sold in the country.

In between trying to figure out the functions of all the toggle switches on the Korean car's instrument panel, Kumar mumbles to explain why he's settled on parting with Rs 410,000 for a Santro.

"It's got more room inside," said Kumar, specifying a feature of special significance to a large man.

Kumar said he had also looked at the Maruti Zen and the TELCO Indica, two models made by Indian carmakers.

Notch up one more sale for the swarm of seven foreign automakers that have entered India's auto market since 1991, when the government opened the door to greater competition.

Prior to liberalisation, the nation had only three car makers -- Hindustan Motors, Premier Automobiles Ltd and Maruti Udyog Ltd.

The first two companies were -- and still are -- making vehicles based on 1950s designs: Hindustan Motors' Ambassador, a gorgeously retro grand coupe, and the Premier Padmini, a sedan widely used as a taxi in Bombay.

Since 1991, however, the number of carmakers operating in India has tripled with the entry of seven foreign automakers, producing vehicles incorporating state-of-the-art technology.

OUTPUT DOUBLED

Annual output has more than doubled over the decade to 500,000 vehicles, with 26 models on sale at prices ranging from Rs 210,000 to a staggering Rs 6.4 million for a Mercedes-Benz S320L, 16,000 times the nation's per capita income. India's population just tops one billion.

"Liberalisation has helped enlarge the market," says K Sivakumar, head of research at Cholamandalam Securities Ltd. "There was single-digit growth before liberalisation, versus growth averaging 20 per cent a year since."

That increase owes much to the creation of wealth unleashed by the partial deregulation of the economy.

"Liberalisation raised incomes and increased the size of the middle class," notes Sivakumar.

Foreign carmakers have also greased sales by introducing new tactics -- like aggressive financing.

"I can structure a repayment plan that is the same as a Santro," said Michael Wagner, the former head of Ford Credit India, referring to the Hyundai-made model that retails for about half the price of the one of the Ford's model sold in India.

Five-and even seven-year financing deals are available, expanding the number of potential buyers and the cost of cars they can afford by spreading payments over a longer period.

Such come-ons have helped Ford grab 22 per cent of India's mid-size car market.

Says Gul Teckchandani, the chief investment officer of F&C Asset Management: "Foreign automakers have been teaching the domestic carmakers that vehicles are sold, they're not bought."

Indian car buyers are also benefiting as increased competition has made vehicles more affordable.

"The real price of cars has gone down around 15-16 per cent over the past three years," according to the Auto Monitor, an Indian auto industry trade publication.

Adds Phil Spender, the managing director of the local subsidiary of Ford Motor, which entered the Indian market in 1996: "The choice of vehicles and value for money has never been better than it is today."

OVERCAPACITY

In fact, there may be too much of a good thing.

Hyundai Motors is rare among the 10 carmakers for making money on its Indian operation. But it could soon be hitting the wall as a result of investing another Rs 16-17 billion to expand capacity.

Some analysts question the wisdom of that move when total industry production capacity is already nearly twice the annual sales.

In addition to Hyundai, Mercedes Benz says it earned a small net profit in the past year despite sales of just over 700 vehicles that are assembled in India.

Boosting sales volumes is certainly the key to long-term success. But analysts note Maruti, India's largest automaker and only volume producer, is now losing money because of the brutal price competition tripped by over-capacity.

Maruti, a 50-50 joint venture between Japan's Suzuki Motor Corp and the Indian government, is estimated to have lost Rs 2 billion the past year.

It controls about 60 per cent of the new car market, down from 90 per cent before market liberalisation.

The other eight automakers are losing money, something fund manager Teckchandani doesn't expect to change anytime soon.

"With the exception of Maruti, everybody else and their mother is doing just 10,000 to 20,000 units," far too few to be profitable, he says.

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