Global Automakers Head to India to Tap into Growing Car Market

Several global automakers are heading to India to sell compact cars, as the country turns into one of the world's fastest growing auto markets. The country is also emerging as a manufacturing hub for small, compact cars.

Twenty-four-year-old Gaurav Mehta wants to buy a car, but has decided to wait and take his pick from cheap, compact models being introduced to the Indian market this year by companies like Toyota, Honda, and General Motors. Most of them will cost around $10,000.

"Well with so many cars coming in this price range now, I thought why not wait and look at the other models, also," Mehta said.

He is among millions of middle-class Indians whom global automakers are eyeing as they target new markets to make up for slumping sales in Western countries.

As India shrugs off the global recession, car sales have been rising quickly. January's figures were 33 percent higher, compared to the same month last year.

The 1.5 million cars sold in India in 2009 are still far behind China, the world's biggest car market. But automakers say there is huge potential to be tapped in a country which has about 12 cars per 1,000 people and where a growing economy is propelling larger numbers into the middle class.

Yogendra Pratap, editor of the magazine Auto Bild, says the focus is on inexpensive, small cars which account for four out of every five cars sold in the country.

"All companies have realized that they need to have a good market share in India to survive recessions in the West, and that means that they need to have successful products in India. The other thing that these auto majors have learnt is that, in India, you need to be very cost competitive, because the Indian local manufacturers get out cars which are very cheap and sturdy so they need to design cars which are built keeping the Indian conditions in mind," Pratap said.

In a country where price matters, the compact cars designed for India cost around $8,000 to $10,000.

Society of Indian Automobile Manufacturers Director General Dilip Chenoy explains why small cars are the overwhelming favorites in India.

"Small cars are within affordable reach and they give you intrinsically a better fuel efficiency and they cost less to maintain, so the overall total cost of ownership of a small car is such that it is very appealing to the Indian customer," Chenoy said.

Many of these compact cars are not only designed for India - they are also being manufactured in the country, to hold down prices in a market where margins are slim.

Auto analysts say domestic companies such as Tata Motors - which produces the world's smallest car, the Nano - have already demonstrated that India has the engineering skills and low-cost facilities to produce small cars. This has encouraged several global automakers to head to India.

Yogendra Pratap says some global automakers are expanding existing production facilities and others are making an entry.

"Toyota's second car plant is coming up. Hyundai already has a second car plant. Nissan Renault is setting up a huge car plant, and Volkswagen has just set up a car plant. So the infrastructure is already on the way, the ground has been laid ready for India becoming a global small car hub," Pratap said.

Many automakers also plan to export the small cars produced in India to other countries, as the world focus moves from gas guzzlers to more fuel-efficient vehicles. This helps them achieve economies of scale and reduce costs.

Dilip Chenoy says annual car sales in India are set to nearly double, to four million by 2016, while the turnover of the automobile industry is expected to rise to nearly $150 billion.

"The ambition in India is to reach a kind of a market size of $145 billion by 2016. And, if we have one or two good years, like last year, and next year may turn out to be, we will be on track in achieving this ambition, and we could become a significant player in the automotive industry by 2016," Chenoy said.

But although car manufacturers are hoping to turn in profits in the growing market, many worry that more cars on Indian roads will only worsen congestion in towns and cities, where traffic already moves at a slow pace on crowded roads.