Automobile Industry in India: Growth and Performance

INTRODUCTION

The journey of humans on the road of mechanized transport began with the invention of wheel in 4000 B.C. The discovery of the wheel was a stepping stone to the revolution which was to occur in mechanical developments. Since then he continually sought to devise on automated, labour saving machine to replace the horse. During early years, it developed mainly in Europe and America and then spread into the rest of the world. On the basis of major design and technology shifts, the world automotive history is generally divided into a number of eras. Although the exact boundaries of each era can be hazy, Scholarship has categorized them as follows:-

Several Italians developed designs for wind driven vehicles. The first vehicle was introduced by Guido da vigenvano in 1335. It was a windmill type drive to gears and thus to wheels. Later Leonardo da Vinci designed clockwork driven tricycle with tiller steering and a differential mechanism between the rear wheels. Then, a Flemish priest, Ferdinand verbiest demonstrated in 1678 a small steam car for the Chinese Emperor Chien Lung. French Army Captain Nicholas Joseph Cugnot was the inventor of the first self-propelled land vehicle in the year 1769. In 1805, a mobile steam dredge was produced by Oliver Evans of Philadelphia. Francois Isaac de Rivaz designed the first "Internal Combustion Engine", in 1807, using a mixture of hydrogen and oxygen to generate energy. He used this engine to develop a car, and the occasion was historic. This was the first vehicle to run on an internal combustion engine. The first successful internal combustion engine was a two-stroke gas driven engine patented by Jean Joseph Etienne Lenoir of Belgium in 1860. In 1862, he again built an experimental vehicle by his gas-engine. He drove it from Paris to Joinville. Nikolaus August Otto and Langen invented the first practical “four-stroke” engine in 1876, and a large number of engines were produced under the patent of Otto and Langen in Europe. Then, Charles and Frank Duryear built the first gasoline powered car in 1893 after several small changes to Lenoier‟s design. In America, similar combustion engines started to be manufactured for lumbering, pumping, power generation and marine use. It was not long before men were thinking with the idea of using such as engine could also be used for carriage purposes. This idea took concrete shape in Europe where Gottlieb Daimler manufactured the world‟s first motor cycle and motor boat in 1882. Then, in the year of 1885 Karl Benz built his first true automobile (Petrol engine) in Mannheim. Benz was granted a patent for his automobile on January 29, 1886 and began the first production of automobiles in 1888. Later, Gottlieb Daimler and Wilhelm Maybach in Stuttgart in 1889 designed a vehicle from scratch to be an automobile rather than a horse carriage fitted with an engine. By this time, however, the world „automobile‟ had not even coined. But the idea of practical self-propelled vehicle had already captured the imagination of many men, both in Europe and United States.

Carl Benz and Gottlieb Daimler shared the credit of changing the transport habit of the world, for their efforts laid the foundation of the great motor industry as we know it today. In the early 1900s, the automobile industry was chiefly concerned with developing a product that would at least operate. Gradually, however, technical advances were recorded both in Europe and United States. France too had joined the motoring scenario by 1890 when two Frenchmen Panhard and Lavassor begun producing automobiles powered by Daimler engine. Two years later, they were quickly followed by Peugeot. In the United States, brothers Charles and Frank Duryea founded the Duryea Motor Wagon company in 1893, which became the first American automobile manufacturing company. They built the first gasoline powered car in America. Henry Ford had an engine running by 1893 but it was 1896 before he built his first car. Ford formed the Detroit Automobile Company in 1899. During this era, three kinds of power sources were being used: - Steam engine, gasoline or petrol engines and electric motors. Further, automobiles were seen as more of novelty than a genuinely useful device. Major breakthroughs in proving the usefulness of the automobile came with the historic long- distance drive of Bertha Benz in 1888 when she traveled more than 50 miles from Mannheim to Pforzheim.

This era lasted from roughly 1905 through to the beginning of World War-I in 1914. Within this decade, various experimental designs and alternate power systems got marginalized. Henry Ford revolutionized the manufacture of automobile with his assembly-line style of production and brought out the Model-T. This model was inexpensive, versatile and easy to maintain. In 1910, Mercer Raceabout built the first sports car. At that time, development of automotive technology was quite rapid. A large number of small manufacturers were competing to gain the world‟s attention. During this era, the key developments were as follow: - electric ignition (by Robert Bosch, 1903) and the electric self-starter (by Charles Kettering, for the Cadillac Motor Company in 1910-1911), independent suspension, and four-wheel brakes.

The Vintage Era lasted from the end of World War-I (1919) throughout the stock market crash at the end of 1929. During this period, the front-engine car came into existence with closed bodies. Two different car makers, Herbert Austin and William Morris introduced mass production methods of assembly in the U.K. Austin seven was the world‟s first practical four seater 'body car' which could be afforded by thousands of people. During this era, some more successful models such as Bugatti Type-35 (1924-1929), Ford Model-A (1927-31), Cadillac V-16 (1930) were developed.

The pre-war part of the classic era began with the great depression in 1930 and ended with the recovery after World War-II commonly placed at 1948. During this period, integrated fenders and fully closed bodies begun to be manufactured. Automobile manufacturers in the 1930s and 1940s refined and improved on the principle of Ford and other pioneers. Henry Ford introduced his powerful flathead V-8 in his main stream model in 1932-1948. Some popular inventions were made, i.e. Bugatti type-57 (1934-40), Citroen Traction Avant (1934-56), MG T Series (1936-55) etc. Volkswagen-Beetle (1938-2003) was the most famous automobile then emerged during this era.

Automobile design finally emerged from the shadow of World War-II in 1949, the year in which the United States saw the introduction of high-compression V8 engines and modern bodies from General Motors‟ Oldsmobile and Cadillac brands. Throughout the 1950s, engine power and vehicle speeds rose, designs became more integrated and artful, and cars spread across the world. Alec Issigonis‟ Mini and Fiat‟s 500 mini cars swept Europe, while the similar Keicar class put Japan on wheels for the first time. The automobile market changed somewhat in the 1960s, as Detroit began to worry about foreign competition because the European makers adopted even-higher technology, and Japan started as a serious car producing nation. On the technological front, the biggest developments of the era were the widespread use of independent suspensions, wider application of full injection and an increasing focus on safety in design of automobiles.

The Modern era is normally defined as the 25 years proceeding the current year. The modern era has been one of the increasing standardization, platform sharing, and computer-aided designs. Body styles have changed as well in the modern era. In this era, every type of vehicle has been produced, i.e. front-wheel drive, all wheel drive and multi-utility vehicle, sports car etc. Full efficiency and petrol engine has been used rapidly in this era. In the mid-1990's, global trade has been increasing which enabled the growth of commercial distribution systems, and also raised global competition amongst the automobile manufacturers. Now automobiles have become increasingly popular among the general population as it gave travelers the freedom to travel. As a result cars became less luxury and more of a necessity.

The Indian automobiles Industry has had a chequered history of more than six decades. The industry comprises of automobile and the auto component sectors and encompasses commercial vehicles, multi-utility vehicles, passenger cars, two-wheelers, three wheelers, tractors and related auto components. The evolution and development of the Indian automobile industry can be viewed in terms of four qualitatively distinct periods:- (i) Automobiles in Pre-Independence Era. (ii) Automobiles in Post-Independence Era-Phase-I (till 1980). (iii) Automobiles in Post-Independence Era-Phase-II (1980-90s). (iv) Automobiles in Post-Independence Era-Phase-III (1990s on words). (i) Automobiles in Pre-independence era: The first motor car on the streets of India was seen in 1898. From 1898 to last 1920s, India remained dependent on imports from the United States and Europe for automobiles. The second phase of the development of automobile industry started in 1928, when the 'General Motors India Ltd‟ set up a plant in Bombay to assemble trucks and cars from components and parts imported from U.S.A. 'Ford Motor Co. of India Ltd' also established its assembly units at Madras, Bombay & Calcutta in 1931. The complete manufacturing of motor vehicles in India started after the establishment of „Hindustan Motors Ltd‟ in 1942 and Premier Automobiles Ltd in 1944.

During this era, firms such as Ashok Leyland Ltd, Standard Motor Products of India Ltd etc. entered into the market. To encourage indigenous manufacturing, the Government of India (GOI) set up tariff commission in 1952. The commission recommended that, "Only those firms which had manufacturing facilities should be allowed to operate and those units which were merely assembling imported completely knocked down (c.k.d.) condition vehicles to stop their business within a period of three years." Consequently, General Motors, Ford and other assemblers closed their operations in the country. Therefore, by the end of 1955, there were only six licensed automobile manufacturers such as Hindustan Motors Ltd in Calcutta, Premier Automobile Ltd in Bombay, Standard Motor products of India Ltd in Madras, Ashok Leyland in Madras, Mahindra & Mahindra Ltd in Bombay and Tata Locomotive and Engineering Co. Ltd in Bombay. The early 1950s saw the entry of firms in the two wheeler segment. In a short period of time, significant growth has been shown in this segment especially in „Mopeds‟. The rapid growth of middle class was the primary reason for the growth of the two wheeler segment. GOI also entered the industry after signing of agreement with M. A. N. of Germany and Nissan Co. of Japan. In the middle of 1960s, India started to export cars and Jeeps to twelve countries. In 1970s the Indian automobile Industry became independent of technical collaborations for complete vehicles and achieved self reliance. Further, the unanticipated oil shocks of 1973 and 1979 created problems of demand, disturbing the situation created by high costs, heavy taxation and general reversionary conditions in the economy. Thus, there were ups and downs in the industry during the phase-I. On the whole, during this era, the Indian automobile industry remained protected by Govt. through licenses, high customs duty on import, steep excise duty and sales tax etc. These policy parameters limited the growth rate of the industry.

This phase may be categorized as the period of foreign collaborations & better capacity utilization. The Maruti Udyog Ltd (MUL) was set up in 1983 in collaboration with Suzuki Motor Co. of Japan to produce cars, vans and jeeps. The production of M.U.L. became an instant hit because of its high fuel efficiency, impressive esthetics and new standards of performance. With the establishment of MUL, the composition in the Indian passenger car market has been increased. The major step taken by the GOI was to adopt a more liberalized economic policy. Consequently, new collaborations came into existence mainly in relation to the production of light commercial vehicles, two-wheelers and passenger cars. It encouraged many multinational automakers from Japan, U.S.A. and Europe to enter the Indian market mainly through Joint venture with Indian firms. The new joint ventures were DCM-Toyota, Swaraj-Mazda, Allwyn-Nissan, Eicher-Mitsubishi, Hero-Honda, Kinetic-Honda, TVS-Suzuki, Maruti-Suzuki, HML-Isuzu Motors and PAL-Nissan Motors Co. Ltd. The Government of India announced a new piecemeal policy in 1985 to enable the better utilization of installed capacities and achieve larger volume of production. According to this policy, any manufacture can manufacture all classes of wheeled automobile, any desired engine size and specification without new license. This policy helped to keep low capital output ratio in the industry. It resulted into increased output and increased sales in both domestic & overseas markets. As a result of semi liberalization, the flood of new entrants into the auto industry had led to a complete transformation of the sector.

The Indian automotive industry produces a wide variety of vehicles such as passenger cars, light, medium and heavy commercials vehicles, multi utility vehicles i.e. jeeps, vans, two wheelers, three wheelers, tractors and other agricultural equipment etc. These are show in figure 1.1. In the present time, the Indian automobile industry has matured greatly. It has become one of the largest industries in India, witnessing impressive growth during the last two decades. With the gradual liberalization of the automobile sector since 1991, the number of manufacturing facilities in India has now grown to 15 manufacturers of passenger cars and multi utility vehicles, 9 manufacturers of commercial vehicles,14 manufacturers of two/three wheelers and 14 manufacturers of tractors [Economic Survey, 2005-06]. The passenger cars transactions in domestic market have surged to 145,905 units in Jan 2010 against the sale of 110,300 units in 2009. In Jan 2010, the total sales of automobiles grew to 1,114,156 units. Table 1.1 shows the production of different categories of vehicles in India.

AUTOMOBILE 2 WHEELER3 WHEELERPASSENGER VEHICLECOMMERCIAL VEHICLE MOTORCYCLESCOOTERSSCOOTERETTESMOPEDS I.C.V.M.C.V.H.C.V.

It is evident from table 1.1 that total production of the automobile vehicles has been continuously increasing since 1950. The production of the automobiles showed an encouraging sprint in 1980, while it witnessed a sluggish development in the first three decades after independence. Total production of the automobiles was 4, 112 units in 1950 which had grown to 13, 96, 136 units and 17, 14, 220 units in 1985 & 1990 respectively. Now, the production of automobile has increased to 1,78, 92,427units in 2010-11.

2221 12865 24598 35273 44539 31246 45606 1891 9262 27518 37401 40973 42834 68311

-

952 16878 49122 113047 207697 417607

- 3

496 1884 4229 12223 26519 4112 23082 69490 123680 202788 294000

558043

2010-11 129332 244932 417000 544000 535000 504037 701550 640934 669719 723330 988540 1209654 1308913 1545000 1773000 1838593 2357411 2982772

101779 92648 113000 125000 1,12,000 135891 173521 156706 162508 203697 275224 350033 391078 520000 545000 416870 567556 760753 1115758 1290878 2660000 2980000 3070000 3374508 3778011 3758518 4271327 5076221 5624950 6526547 7600801 8444000 8000000 8419792 10512903 13349349 49267 85762 160000 220000 230000 209033 205543 203234 212748 276719 340729 374414 434424 556000 500660 497020 619194 799553

1396136 1714220 3350000 3869000 3535000 4223469 4858625 4759392 5316302 6279967 7229443 8460648 9735216 11065000 10888000 11172275 14057064 17892427

Sources: 1950-80 from Commerce Research Bureau, 1985-95 from Automotive Component Manufactures in India, 1995-96 to 2010-11 from Ministry of Heavy industries and public Enterprise.

The automotive industry crossed a landmark with total vehicles production of more than 10 million in 2007-08. According to Society of Indian Automobile Manufacturers (SIAM) the cumulative growth rate of passenger car market is 32.28 percent in 2010-11. The share of passenger car has been increasing after the entry of MUL. This changed the industry‟s profile dramatically. The de-licensing and removal of quantitative restrictions on imports opened the gates to international automakers into the country with an idea to tap the larger population. Further, the table also indicates that production trend is now more in favour of the two wheelers segment. Two-wheelers enjoyed around 72 percent market share during 1995-96. The production of two-wheeler segment grew by 18.9 percent 2007-08. The primary reason for this growth of two-wheeler industry is the rapid growth of middle class section in the society. Figures 1.2, 1.3, 1.4 and 1.5 show the vehicles production of other segments including passenger vehicles, commercial vehicles, two wheelers and three wheeler respectively. The commercial vehicles and three wheelers segment clocked a growth rate of 41 % in 2010-11.

350000410000401000390709 577243513415564052608851 842437 9605051045881 1323000 1528000 67000134000 134000 113328 124307 127519 105667 114479 146103249149 263032 222000 245000 1773000 1545000 1308913 1209654 988540 723330 417000544000 535000 504037701550 640934669719

0

200000 400000 600000 800000 1000000 1200000 1400000 1600000 1800000 2000000

1995-961996-971997-981998-991999-002000-012001-022002-032003-042004-052005-062006-072007-08

Cars MUVs Total

113000 125000 112000 135891173521 156706 162508 203697275224 350033391078 520000 545000

0

100000 200000 300000 400000 500000 600000 1995-961996-971997-981998-991999-002000-012001-022002-032003-042004-052005-062006-072007-08

8000000 8444000 76008016526547 56249505076221 42713273758518 3778011 3374508 3070000 2980000 2660000

0

1000000 2000000 3000000 4000000 5000000 6000000 7000000 8000000 9000000

570000 556000 434424374414 340729276719 212748 203234 205543 209033 230000 220000 160000

0

100000 200000 300000 400000 500000 600000 1995-961996-971997-981998-991999-002000-012001-022002-032003-042004-052005-062006-072007-08

A robust manufacturing capacity has been installed by the Indian automobile industry over the last two decades. The installed capacity in different segments of automobile industry is as under:-

(In million)

Four Wheelers 1.51 1.72 Two & Three Wheelers 7.83 10.85 Grand Total 9.34 10.85 Source : SIAM

Multinational car manufacturers have been using their Indian facilities to cater to the international markets. In passenger car segment, the growth rate was high in 1995-96 and 1996-97, but thereafter it declined in the next four years. This

35489 37161 29705 25468 23271 22990 50088 70828 126249 160677 170193 2219 2,484 3288 2654 5148 4122 3077 1177 3067 5736 5579 10456 13836 14084 10108 9912 13770 11870 12255 17227 29949 40581 111043 124728 125504 100002 83272 111138 104183 179682 264669 366724 513256 18798 21973 18595 21138 18388 16263 15462 43366 68138 66801 76885 178005 200182 191176 159370 139991 168283 184680 307308 479350 629887

806494

2007-08 194452 214143 4000 4275 49537 58999 619644 819847 143896 141235 1011529 1238499

Total 1160714 46826 292584 3523692 670938 5694754

Source: SIAM

is also true for multi-utility vehicles, two and four wheelers. After a temporary slump 1998-99 and 1999-2000, exports registered robust growth in the subsequent years. Indian automobiles are being exported mainly to the following countries:-

Cars Egypt, Kenya, Nigeria, Somalia, Tanzania, Afghanistan, Nepal, Turkey, Hungary, Greece, Italy, Netherlands, Spain, Austria, Malta CVs Egypt, African countries, Nepal, Sri Lanka, Jordan, Kuwait, Hungary, Russian Federation, France, Brazil Two-wheelers African countries; Bangladesh; Sri Lanka; Turkey; United Arab Emirates; Paraguay; United Kingdom; Germany; Argentina; Mexico; Australia; Hong Kong, China

In order to realize the growth potential of Indian automobile industry in both domestic and global market and to optimize its contribution to the national economy, the Development Council for Automobile and Allied Industries has decided to draw up a Ten year Mission Plan under the title “Automotive Mission Plan (APM)” for the development of the Indian automotive sector into a global hub. The AMP has 25 key recommendations focused at attracting an incremental investment of Rs. 1, 60,000 – 1, 18,000 cr. (US $ 35 to US $ 40 Billion) over the next 10 years. The turnover of industry would be 6, 67,000 cr. in 2016, which is 4 times the current turnover. A key addition to the earlier document was the setting up of a monitoring committee to regularly review the progress of the implementation of the AMP. It clearly indicates the commitment of the government towards the growth and development of the automotive industry in India. With increased competition, established automobile manufactures in India are becoming more conscious about technology and quality. India has also joined WP–29: 1998 agreement for global harmonization of automotive standards i.e. Safety, Emission and Beyond. Indian automobile firms are incorporating ISO 9000 certification and Total Quality Management as explicit corporate goals.

As per as estimates of SIAM, the automotive industry in India will grow rapidly in the next 10 years. This projection is based on the inputs from the experts and the studies conducted by professional agencies.

Passenger Cars 10 Multi Utility Vehicles 8 M & HCVs 6 LCVs 9 Scooters 3 Motorcycles 18 Mopeds 7.5 Three Wheelers 11 Tractors 8.5 Source: SIAM On the basis of estimated CAGR, it is expected that Indian automobile vehicles will grow as mentioned in the table 1.5. India is able to maintain its eminent position of the largest tractor and three wheelers manufacture in the world and the world‟ second largest two wheeler manufacturer. By 2012, India would emerge as the world‟s 8th/9th largest car producer (at present India is 11th largest) and retain 4th largest position in world truck manufacturing sector. According to ACMA, India has the potential to become one of the top 5 automotive economies by 2025 (see Figure 1.10).

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