India's tempting--but tricky--auto market.

India's economic progress pales when compared to China's stellar growth. But the crouching Indian tiger should not be ignored. India already has entered Asia's elite league of auto-producing nations. If global OEMs want to rule India's roads, they will have to build world-class cars with Indian cost structures.

Considering India's size and turbo-charged growth, comparisons with China are inevitable. All too often, however, India draws the shorter straw. When it comes to automotive production, India is not in the same league as China. Whereas India sold 1.2 million cars and multi-utility vehicles last year, China sold more than two million passenger cars. Foreign direct investment (FDI) provides a similar story. Although India's FDI policy has become more generous since 2000, its FDI is minuscule compared to China's. India's FDI inflows jumped 25% during 2004 to USD 5.33 billion. But that's a trickle of the USD 60 billion FDI flowing into China, according to the United Nations Conference on Trade and Development in its World Investment Report 2005.

Yet as attractive as China might be, European carmakers and suppliers would be wise to keep at least one eye pinned on India. They also should keep in mind that India's automotive market is not a cookie-cutter mold of China's car sector. The structure of India's auto industry is unique when compared to other developed economies. Besides a strong four-wheeler market, India also has sizeable two-wheeler, three-wheeler and commercial truck markets. The country rolled out a total of 8.5 million vehicles in 2004, of which 1.2 million were passenger cars and multi-utility vehicles. By 2010, India will be a two million passenger-car market and will become a three million market by 2015, according to Roland Berger Strategy Consultants. If only India had previously developed an adequate road infrastructure, these volumes could have already been reached. Purchasing power for such volumes exists today, but road development is moving at a far slower pace.

Although the foundation for a strong passenger-car industry was laid in the early 1990s, real momentum has been building only since 2000, when the government significantly changed its policies, taking steps to make manufacturing more internationally competitive by creating export promotion zones and expanding infrastructure. India also freed industry from excessive regulations five years ago.

Its stance toward foreign direct investment also became less restrictive. In China a joint venture is required for domestic production. India's auto FDI policy, on the other hand, allows global DEMs to have 100% ownership, which has created a healthy industry from the start. The Indian market therefore is full of real players and not "aspirers."

State of the Industry.

Given the potential of India's automotive market, it's worth taking a closer look at its structure. The future of the Indian market is in the hands of nine automakers, which command 98% of the total market. The Indian Big Three--Maruti, Tata and Mahindra & Mahindra--boasted a combined market share of 65% in 2004 and are capable of designing, developing and producing indigenous vehicles. Of the global OEMs, Hyundai has the outright lead with an 18% market share. Hot on Hyundai's heels is fast-growing Toyota.

Despite their clout, the Big Three Indian carmakers are losing market share. Their strengths primarily lie in the A and B segments. India, however, is experiencing considerable segment migration to C-segment vehicles (e.g., Honda City, Opel Corsa and Hyundai Accent). It's precisely in the C segment and above that global OEMs are strong. That's why Roland Berger expects their market share to spike in coming years.

What's Needed to Compete.

To be successful in the Indian market, carmakers require products that carry the highest customer value. In short, they must provide European-quality cars at Asian prices. Price remains the crucial selling point in this market. But driving comfort and life-cycle costs, especially costs related to fuel economy, are becoming more important factors for potential car buyers in India. Since local diesel prices are 30% lower than gasoline, the demand for efficient diesel engines should grow even more strongly, and European carmakers should hold a distinct advantage in this area. Global OEMs must build world-class cars within Indian cost structures if they want to be successful. India exported 130,000 passenger cars in 2004. To achieve the necessary economies of scale, Indian operations will need to be used as regional export hubs to supply other markets. Carmakers there can only achieve fixed-and-variable cost economies if they have a good balance of domestic sales and export sales. Additionally, Indian operations should be leveraged in an OEM's global value chain. Those companies that integrate India's strengths, such as engineering and software development, into their worldwide operations are seeing tremendous success. They also are benefiting from their local Indian subsidiaries.

India potentially is the next red-hot market. OEMs that have their finger on the local pulse and manage to globally integrate their Indian operations have a good chance of seeing a profitable and sustainable operation develop.

By Dr. Thomas Sedran, partner, Roland Berger Strategy Consultants, [e-mail]

CHINA AND INDIA TAKE ON THE WORLD

                         Share of        Economic
Sales         FDI (USD)  Global Economy  Growth

China  2.0 m  60.00 bn   13%             868%
India  1.2 m   5.33 bn    6%             311%

1) passenger vehicle sales in units in 2004
2) in 2004
3) GDP in 2004
4) GDP growth since 1980 (1980-0%)

Source: Deutsche Bank Research: DECO; UNESCAP; UNCTAD

Comparison of the Chinese and Indian industries. Despite China's greater
size, India should not be overlooked.