Rising Costs Threaten India's Auto Growth

Infrastructure and labor costs are increasing

Rising production costs and dilapidated infrastructure threaten the Indian auto industry's ambitions for fast growth, according to a survey by KPMG published Jan. 8. An Indian government "Automotive Mission Plan" aims for automotive sales to more than quadruple to $145 billion by 2016, and for indirect and direct auto sector employment to grow to $25 million from $13 million today. But this may be tough to achieve due to insufficient investment to improve India's battered infrastructure, which creates major bottlenecks, said KPMG after interviewing 40 top executives from the Indian automotive industry.

India may be full of potential but it also has challenges "from the remotest road-building site to the highest levels of government where policy is hammered out," said Yezdi Nagporewalla, a director at KPMG India. Periods of high confidence about the auto sector's prospects are just when "questions need to be asked," added the report, released a little ahead of an international auto trade fair in New Delhi that opens this week. Labor costs were a big worry as a talent shortage drives up pay and staff turnover in an economy that historically has relied on low wages, the research said. "Auto executives are also concerned about India's eroding cost advantage and the increasing challenges of rewarding and retaining talent," the report said.

India's automotive industry, which produces 1.5 million vehicles annually, is worth $34 billion a year and contributes five percent of India's gross domestic product. Many firms believe manufacturers will have to work harder to increase productivity as labor costs rise but automating production lines would require more capital than many can raise. "Costs right now represent a competitive advantage but that cost advantage is depleting with time," Nagporewalla said.

A number of companies raised doubts that the government recognized the size of the challenge of building a "manufacturing sector on a global scale," Nagporwalla added. India was "a very attractive emerging market on a global scale" for automotive players due to economic growth that has averaged nearly nine percent over the past four years, spurring vehicle demand explained Nagporwall. "Every global player is in India in some form or another."

The domestic market in the country of 1.1 billion people holds "huge attraction" for manufacturers, said Dilip Chenoy, director general of the Society of Indian Automobiles. Car penetration is just seven per 1,000 people compared to 550 per 1,000 in such countries as Germany or 476 in France, Chenoy said, while domestic car sales jumped more than 16% in November to 103,031 units from a year ago, according to the latest figures.

Copyright Agence France-Presse, 2008

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