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India's Automotive Outlook Is Coming up Diamonds

March 7, 2011
A burgeoning middle class is creating a turbocharged automotive market with unique opportunities and challenges.

When Karthikeyan Natarajan describes the demographic shift taking place in India, he says the nation's population is taking on the shape of a diamond-narrow on the top and bottom, and wide in the middle.

"What that means is the middle class will grow to at least 500 million to 600 million people in the next 10 years," says Natarajan, who is senior vice president and global head of Integrated Engineering Solutions at the Hyderabad, India-based business and IT services firm Mahindra Satyam. "And the ability of people who are using two-wheelers to buy a car is on the rise." That's a big reason why automakers see India as a jewel of an emerging market.
Natarajan: India's economic and demographic conditions are right for a boom in auto sales over the next few decades.
A recent Booz & Co. report concluded that by 2015, India will become the fourth largest automotive market in the world, with vehicle sales eclipsing every major European country. The report also predicts that by the mid 2030s, vehicle sales in India will surpass the United States-positioning China and India as the superpowers of the global automotive market. Booz & Co. estimates that annual vehicle sales in India could grow to more than 6 million units by 2020, to 11.7 million units by 2030 and past the 15 million-unit range by the mid 2030s. Natarajan sees India's growth spurt as the result of a perfect storm: a booming economy; the emergence of as many as 400 million middle-class families over the next decade; and a population of 35- to 45-year-olds that will peak over the next few years. "Typically, you'll find that people around the age of 18 to 20 buy two-wheelers, use these for about eight to 10 years and then migrate to a four-wheeler," Natarajan explains. "So the biggest volume of cars is sold to the age group of 35 to 45." Cashing in on India's growth trajectory, however, comes with some challenges that are unique to a market dominated by small, low-cost vehicles. According to the Society of Indian Automobile Manufacturers, two-wheelers such as scooters and motorcycles accounted for 76% of the market share in India's fiscal year 2010. As more middle-class citizens can afford to upgrade from two-wheelers to passenger vehicles, Natarajan points out that automakers must be able to offer features on a $5,000 vehicle-such as power steering and antilock brakes-that typically would be associated with a vehicle twice as expensive. In his recent conversations with U.S.-based automakers, Natarajan has found that they are keenly aware of the fact that developing a low-cost platform-profitably-is table stakes to the game in India. Another unique dynamic in play: Vehicles in India often have anywhere from five to seven passengers in them, Natarajan explains, and many car owners pay chauffeurs to navigate the congested roadways for them. That puts the onus on automakers to maximize interior space and "find and fine-tune ways to bring in entertainment and controls and make them accessible to the people who are sitting in the backseat," Natarajan says. Hyundai's Inroads Foreign automakers seeking to make inroads into India's market might look to South Korea's Hyundai as a good model, asserts Natarajan. Within a few years of entering the Indian market in 1996, Hyundai Motor India Ltd. became the second-largest vehicle manufacturer in the country. What did Hyundai do right? Natarajan notes that the automaker hit a home run with its first entry, the Santro. The tiny hatchback offered power windows and other creature comforts that were considered "added" features by Indian automakers at the time. Shortly after introducing the Santro in the late 1990s, Hyundai wisely made a number of "tweaks" to accommodate the needs and preferences of the local market, including raising the vehicle's ground clearance to make it easier for it to safely negotiate the ubiquitous potholes on India's roadways. "At first [the Santro] had power windows in the front seat, while the back-seat windows were opened by cranking a handle," Natarajan recalls. "And within six months or so, [Hyundai] realized that the chauffeur has the power windows while the owner of the car has to crank the handle, so you need to provide power windows for the people in the back."
Hyundai India hit a homerun with its first entry into the market, the Santro. Shown here is the latest iteration, the Santro Xing.The takeaway for other international automakers, Natarajan says: "The end-user requirements, usage patterns and road conditions [in India] necessitate a different kind of engineering thinking for including and deleting the features that will trigger the volume of design activity." Hyundai's rise in India is an even more impressive feat considering that in the mid 1990s, the Indian auto market had just a handful of players. The elite group included Mahindra & Mahindra Ltd., the parent company of Mahindra Satyam and the nation's top producer of utility vehicles and tractors; and Maruti Udyog Ltd. (now Maruti Suzuki), which had established a monopoly in the passenger-vehicle market and was partially owned by the Indian government. Fast-forward to the present. In calendar-year 2010, Hyundai Motor India sold more than 600,000 vehicles, including more than 241,000 vehicles overseas. With two factories in India, Hyundai is the nation's largest exporter of vehicles. "I think the same opportunity exists for other players as well," Natarajan says of the Indian automotive market. Follow IndustryWeek senior editor Josh Cable on Twitter at @JCable_IW .

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