India has emerged the leader in small cars, overtaking Japan, as declining sales in Western markets coupled with robust growth in Asia redraws the global map of the auto industry faster than many expected.
It's well known that China will overtake the U.S. as the world's largest car market this year. Less noticed is the fact that India will top Japan for the first time in sales of super-compact cars. It overtook Japan as the world's number one producer of basic cars in 2007.
Automakers like Ford, Nissan, Volkswagen, General Motors, and China's Shanghai Automotive Industries Corp. are pouring hundreds of millions of dollars into the country, hoping to capture a piece of the growing market for tiny, inexpensive passenger vehicles. As they do so, they are quietly transforming India into an export hub for small car manufacturing.
"From a small car production hub perspective, India is right in the center of the radar," said Michael Boneham, head of Ford India, which plans to roll out its first India-made compact, the Figo, in the first quarter of next year.
More than 892,000 basic cars — the smallest category of passenger vehicles — will be sold in India this year, up 14 percent from last year and surpassing the 708,034 forecast for Japan, according to J.D. Power and Associates.
Unlike China, Russia and Brazil, where consumers buy a range of cars, from basic to luxury, Indians overwhelmingly prefer small, affordable cars.
Nearly half of all cars sold in India — like Maruti Suzuki's Swift, GM's Spark and Hyundai's Santro — fall into the basic category. These are cars so small they're almost nonexistent in the U.S. market. Think of them as sub-sub-compacts.
Drive down the streets of a typical Indian megacity, where the bulk of car buyers live, and it's easy to see why. Millimeters count. Drivers squeeze through any remotely plausible opening on the clogged streets, grazing handcarts, bicycles, cars, pedestrians and livestock in the process.
And price matters. Executives say most Indians won't spend more than $8,000 on a car.
To manufacture these low-margin vehicles profitably, carmakers must localize production to cut costs and ramp up volumes.
For now, they can't sell enough cars in India alone to make the numbers work. The market is too consolidated — Maruti Suzuki sells half of all cars in India — and too small. India ranks 10th globally for total car and truck sales. J.D. Power expects Indian car and truck sales to hit 1.9 million this year, a far cry from China's 12.3 million.
Hungry for scale, carmakers must count on exports.
"The margins are slim to say the least," said John Parker, Ford's executive vice-president for Asia Pacific and Africa. "We see exports as an opportunity to expand the volume base. The key thing in this area of the marketplace is to create scale."
Ford Motor Co. has invested $500 million in India and its factory in the south Indian city of Chennai can make up to 200,000 cars a year. Even if sales more than double, to 60,000 vehicles next year as executives hope, they've got capacity to spare.
Parker said the company has not ruled out shifting production of the Fiesta and Focus from Europe to India.
Nissan Motor Co. plans to shift production of its Micra cars for the European market from the U.K. to Chennai, which it also aims to use as an export hub for Africa and the Middle East. The company plans to roll out its first made-in-India compact in May, part of a seven-year, $920 million India investment it made with partner Renault.
Volkswagen AG has invested Euro 580 million ($847 million) in India, and this month started production of its first India compact at a factory that can make up to 110,000 cars a year.
General Motors Co. opened a second, $300 million factory in India in September 2008, boosting annual capacity to 225,000 vehicles. This month, it teamed up with China's SAIC to launch an India joint venture, with fresh investment of up to $350 million.
Analysts caution that India's emergence as an auto hub still faces headwinds like bureaucratic red tape, labor unrest, inefficient ports, poor infrastructure and competition from Thailand and South Korea, which recently signed a free trade agreement giving carmakers duty-free access to Europe.
"It's not a foregone conclusion despite the high demand," said John Bonnell, director of automotive forecasting at J.D. Power and Associates in Bangkok. "Compromising that is a lot of red tape, bureaucracy and unions."
Still, the global appetite for basic cars is growing. Sales of such cars will hit 4.9 million vehicles this year, up 13 percent from last year, while total car and truck sales will shrink by 6 percent, to 62.9 million vehicles, says J.D. Power and Associates.
The Indian government has encouraged small car production with tax incentives, and, unlike China, it allows foreign companies to fully own their Indian subsidiaries.
That control over production and revenues is part of what convinced South Korea's Hyundai Motor Co., the largest car exporter in India, to shift small car production to India 11 years ago, said H.S. Lheem, shortly before he stepped down as chief executive of Hyundai Motor India.
Nowadays, India is Hyundai's largest operation outside Korea. So far this fiscal year, Hyundai has exported about half of the 377,019 cars it manufactured in India, 65 percent of them to Europe.
"Chennai could be a good Detroit in India," Lheem said.