Smaller Is Beautifuller

Chidambaram rationalised this micro-tinkering of the duty structure with a customary big-picture visionary statement. "I am confident that industry will seize the opportunity to make India a hub for the manufacture of small and fuel-efficient cars," he said. But, within a few hours, the script soured. Some of the auto majors were questioning the FM’s thinking on both the small- and the big-picture fronts. Was it really a good move to reduce duties only on small cars? Will the cuts help India become a global manufacturing hub for small cars?

Not quite. Laments Rajeev Chhaba, president and MD, General Motors India: "The budget is not on expected lines. We wanted the duties to be reduced on all cars." Many feel the FM has distorted the existing level playing field to largely favour one carmaker, Maruti Udyog (see box). Notes a senior manager at Honda Siel: "The proposal has changed the rules of the game. In the uniform duty regime, the customer decided which model to purchase as per the needs. Now, they will opt for smaller cars by default because of the higher price differential." Chhaba is trying to goad SIAM to ask Chidambaram to reduce duties on mid- and large-size cars too.

But surely, no one can fault the FM on his desire for India to emerge as a global player. Small cars account for 70 per cent of the one million passenger cars sold every year in India. Global consultants like Booz-Allen Hamilton and McKinsey have estimated that the domestic market will double by 2010 and the growth rate in passenger-car sales will be 40 per cent higher than theGDP growth rate. By 2015, India may grab a 3-4 per cent share of the global auto components mart ($700 billion). The same optimistic and positive trend can be seen in the small-cars category.

It has already started with Maruti, which started exporting its 800 model to neighbouring South Asian markets a decade ago. Now, Maruti, Tata Motors and Hyundai Motor India sell Zens, Indicas and Santros in Europe and the US. Today, nearly 1,65,000 units are shipped out, compared to 40,000 in 1997 and, by 2010, exports are expected to cross the $10-billion mark. Hyundai has identified India as its regional production centre, and Suzuki has similar plans for Maruti. "India will become a major exporter of small cars, and that will happen without any major policy interventions," predicts Anang Dev Jena, head, Synovate Motoresearch.

As global crude prices zoom, the demand for small cars is on the upswing. At present, the two major global small-car hubs are Japan and Korea, while China is still focused on producing the bigger and high-margin sedans. Indian companies, with cost advantages, skilled manpower and their existing or prospective tie-ups with the Japanese and Korean firms, can dream of satiating a part of the growing global demand. In fact, they seem to be on the fast track and in a position to transform Chidambaram’s dream for small cars into a huge reality.

The only issue is that minor tinkering with duties will not help realise it. Agrees Jena: "Excise duty reductions will not have any bearing on the export market in the near to medium term. It will only help domestic sales." Adds B.V.R. Subbu, president, Hyundai Motor India: "I am puzzled how the excise cut can help in making India a hub for small diesel cars, as we are not making any for the global markets currently." But, in the long run, if the lower prices of the small cars lead to a higher demand, it may result in cost advantages due to economies of scale.

A Maruti Udyog spokesperson notes that economies of scale is the most critical factor for the auto sector. "As the domestic demand increases, our cost per car will come down, and we’ll benefit in terms of both costs and productivity. As part of the same process, we’ll scale up and higher sales of individual models will help us make them cost-effective and, hence, export-worthy," the spokesperson explains. Just after the FM finished his budget speech, Maruti Udyog’s MD Jagdish Khattar said the positive impacts of the move could be seen as quickly as in three years. Passenger car sales, which have grown by just six per cent this fiscal, are likely to regain their double-digit growth rates in the next fiscal and increase by 16-18 per cent.

Higher sales, especially of small cars, will force competitors like Tata Motors, Toyota and Honda to hasten their forays in the small car segment. Foreign majors like General Motors, Honda and Toyota are seriously eyeing the small car segment. For Toyota, whose stated vision is to capture a 10 per cent market share in India, the rolling out of small-car models is imperative. Sources indicate that the Japanese giant may enter the segment through models that are produced by its wholly-owned small-car subsidiary, Daihatsu, within the next 24 months. Another Japanese player, Honda, whose Fit model is among the hottest-selling compact cars globally, plans to add a smaller model to its existing sedan portfolio (Accord and City). GM is sure to launch Spark, a model built almost entirely on the Daewoo Matiz platform, after coming in with Aveo that competes with Maruti Udyog’s Swift and Hyundai’s Getz.

Among the Indian players, Tata Motors’ Ratan Tata has categorically said his dream small car will be ready by 2008. Although he may not be able to stick to his plan of launching a car that’s priced less than Rs 1 lakh, he has disclosed some details of his company’s strategies to reduce costs, either by using cheaper raw materials or outsourcing sub-assemblies. The market buzz is that Bajaj Auto is in preliminary talks with Germany’s Porsche to make a small car, though Rahul Bajaj has publicly denied any foray into the car segment. Not to forget Maruti Udyog’s consistent claims that it can further reduce the price of older models like 800.

However, sceptics think that, unlike the highly efficient two-wheeler sector in the country, Indian carmakers are still still not lean—and mean—enough to become low-cost global suppliers. For instance, in the past 15 years, the cost of motorcycles has increased by Rs 20,000, or 100 per cent, but the price of the small car has gone up by over Rs 1,00,000, or over 200 per cent. India is currently the largest manufacturer-exporter of two-wheelers, and firms like Bajaj Auto are aggressively expanding into the Southeast Asian and Latin American markets. "It is an unfair comparison as reverse engineering for cars and bikes is vastly different. It is far easier to reverse-engineer a Caliber to make a Boxer than to transform an already basic, bare-bone Maruti 800 into something more inexpensive," says a Delhi-based auto analyst.

To change that scenario, SIAM, the nodal body for the auto industry, says the long-term blueprint should include attractive and critical policy changes. According to SIAM, the tax incentives extended by the Thailand government have enabled the country to emerge as the global leader in the pick-up trucks category. Ford, the world’s second-largest automaker, produces the bulk of its pick-ups in Thailand to be sold in the US market. Similarly, Japan offers major incentives for manufacturing the 660-cc mini-cars in that country. Global consultants like McKinsey and Booz-Allen Hamilton also say India will need to invest Rs 25,000 crore every two years to achieve the optimistic growth estimates. The upshot is, there is some distance to be travelled.

Analysts, especially after Chidambaram’s statement, are convinced about the upa government’s commitment to make India a global small car hub. "We are likely to see a significant rise in domestic sales in the coming fiscal and that is likely to encourage the government to further reduce the excise duty only on small cars to eight per cent in the next budget," says Ramnath S., VP (research) with Mumbai-based brokerage firm SSKI. He has his reasons pretty pat. "Just imagine the impact of a nearly Rs 30,000-40,000 price cut on small cars in one year. There is a slow but sure movement towards becoming the small car hub," he notes. But, as is evident, Chidambaram will have to do much more to achieve equity in policy terms, and the auto majors will have to reciprocate by pulling up their socks to achieve that objective. Consonance will make for a smooth drive.