09/04/08 A new age of the small car has arrived, and India is positioned to become the world leader in this fast-growing segment—if it can properly take advantage of the vast opportunities currently before it.
A new age of the small car has arrived, and India is positioned to become the world leader in this fast-growing segment—if it can properly take advantage of the vast opportunities currently before it. Economic growth in India, as well as other large emerging markets such as Brazil, Russia, and China is set to usher in a new era of small, affordable automobiles, as manufacturers seek to satisfy millions of first-time car buyers. As demand for cheap, smaller cars increases, the center of gravity in the world’s car industry is shifting to countries such as India, which is well placed as both a large market for small cars and a major hub for their design and production.
According to Booz & Company’s new report “Cars for India, Cars for the World,” the total number of automobiles sold worldwide will increase from 69 million in 2007 to 80 million by 2012, with emerging markets accounting for more than three-quarters (77 percent) of the increase.
India, one of these major emerging markets, is also home to innovative carmakers such as Tata and Mahindra, as well as top-tier suppliers like Bharat Forge and TVS Group. These companies are focused on making light, fuel-efficient vehicles by reexamining conventional wisdom along every part of the vehicle value chain, including design, manufacturing, sales, and service.
Tata’s new Nano model, set to go on sale in autumn 2008, is an early example of the potential capabilities of the Indian car industry, demonstrating the advantage Indian companies have in understanding what local customers want and value. Costing just US$2,500—roughly half the price of the previous cheapest car in India—the model is expected to sell 250,000 units in its first year.
Whereas traditional manufacturers have created full-service value chains that include product development, purchasing, manufacturing, and marketing, Indian carmakers are working around gaps in their infrastructure, using small teams of engineers, designing cars around available components, and turning to nontraditional suppliers such as makers of two-wheeled vehicles.
Already, 8 million Indian households are able to afford cars in the $5,000 to $8,000 range, the report notes. But the advent of models such as the Nano, and models made by Toyota, Suzuki, and Renault in the $2,500 to $5,000 range, will see the market expand threefold in the next few years. A large domestic market will support India’s burgeoning engineering talent pool as well as a large supplier base, helping carmakers create models for sale elsewhere in the developing world.
In time, India is likely to become a hub for the production of small cars, with Indian carmakers and makers of two-wheelers being joined by a host of global manufacturers such as Ford, Hyundai, and Honda. Many local and global companies see India as both an attractive market and as a base for the export of small cars to other parts of the world, according to the report.
Indian manufacturers will have a number of advantages in the global car market; however, they will face stiff competition from Japan, Korea, China, and Thailand, all of which also have companies capable of building small cars suitable for the new markets. Like the Indian companies, Chinese manufacturers such as Chery will have the advantage of a fast-growing market on their doorstep.
The new small-car market will present a steep challenge for U.S. and Western European carmakers, the report says. Although companies such as GM, Renault, and Volkswagen are committed to entering the affordable market, they don’t yet have much marketing experience in India or expertise in how to take advantage of India’s low-cost labor and supplier base.
Given its cost advantages, the authors expect India to overtake South Korea as a world’s number one supplier of small cars by 2015. However, for that to happen the Indian government will have to work hard to support the industry by actively promoting small-car R&D, encouraging universities to develop new automobile technologies, and investing in testing labs. The government should also consider ways to encourage small-car exports and to bring foreign firms into the country to set up joint ventures and partnerships with local companies.
For their part, India’s manufacturers should continue focusing on the needs of their target markets, using nontraditional suppliers and co-locating them with their own plants. The report recommends following the lead of Tata in its development of the Nano, which concentrated on building a low-cost car rather than a cheap one. Designing cars by simply removing content and features from more-expensive models will not help India, or any other country, lead the worldwide small-car market.
Down the line, Indian carmakers will have the option of developing not only new vehicles, but new business models as well. Those models might include partnering with well-established two-wheeler firms; offering self-assembly kits; or developing a direct sales model in which customers can order their vehicles over the Internet or via sales kiosks that share space with other retail outlets. The firms could also consider new types of financing, including allowing extended families to buy cars together, other kinds of shared ownership, and even rental programs.
India’s small-car focus has the potential to reduce the country’s trade deficit, create millions of new jobs, and reduce the nation’s thirst for oil imports by promoting fuel-efficient cars. However, realizing this potential won’t be easy: India’s car companies and government have a good deal of work to do first.