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									Center for Information Technology and the
             Global Economy


Student Research Working Paper series
                          S03-003



  THE INDIAN AUTOMOBILE INDUSTRY:
 Opportunities for Investment and Expansion


                           May 2003




Authors: Rinki Chakrabarty, Tommy Htay, Maheen Qureshi, Manju Valmiki
                 CITGE student research working paper series




                           TABLE OF CONTENTS



                                                               Page

I.     Executive Summary                                         3

II.    Macroeconomic Fundamentals                                4

III.   Analysis of the Business Investment Climate               7

       & Business Practices

IV.    Industry Sector Analysis                                 16

V.     Five Year Business Outlook                               27

VI.    Conclusions and Recommendations                          31



Appendices

References




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I. EXECUTIVE SUMMARY

       The Indian automobile industry is one of the most well-established in the

developing world, dating back to 1942 when Hindustan Motors began manufacturing

vehicles in the country. The industry has progressed from an initial protectionist phase

to one of reform, and in the 1990s, towards deregulation and growth, to the current

outlook towards exporting in certain segments and viable opportunities for investment

and expansion in related sectors.

       With the economy of India growing at over 4.3% in real terms, disposable

incomes of consumers are rising and demand for passenger cars as well as two-wheeler

vehicles is increasing. However, given the maturity of the industry, especially in contrast

to that of China, which has a relatively nascent automobile industry and exploding

passenger car demand due to an economic growth rate of over 9%, there is not much

room for expansion and new opportunities in India’s automobile industry. Over 10 major

players already exist, making the market saturated. Poor road infrastructure and low per

capita incomes contribute to low demand for passenger cars and manufacturers are

operating at uncompetitive excess capacity.

       In the next five to ten years, it is quite likely that several of the weaker players in

the market will not survive and consolidation in the industry will continue. The real

opportunity for a multi-national enterprise to expand and realize growth in the Indian

automotive industry lies in the auto components industry and in design & engineering. If

Indian auto components suppliers rise to international quality standards and keep costs

low, this piece of the industry could flourish. In addition, R&D, design, and engineering

are emerging as India’s comparative advantage due to the highly educated, English

speaking, globally competitive graduates of India that have fueled the success of the IT




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industry. Global automobile manufacturers are already taking advantage of these

resources and there remains a great opportunity for growth in this area.

II. MACROECONOMIC FUNDAMENTALS 1

2.1 India: Geography and Infrastructure

       The Republic of India is a constitutional federal democracy made up of 28 states

and 7 union territories. The Indian population stands at 1.045 billion with a real GDP

growth rate of 4.5%. The country has national highways covering just 58,112km and

that carry approximately 45% of total road transport. The “National Highways

Development Project” is aimed at expanding the highways and also 4/6 laning.2 India

has 11 major ports managed by the Port Trust of India with five on the east coast and six

on the west coast. These major ports handle 82% of the country’s cargo activity and are

operating beyond capacity. There are 148 minor ports handling 18% of total cargo. The

average turnaround time for goods to be cleared through the ports is 4.7days.



2.2 India: Monetary Policy

The Indian Fiscal year spans April 1st to March 31st. The Reserve Bank of India (RBI)

controls the monetary policy in India. Currently, the benchmark bank rate stands at a

relatively low 6.25%. The Cash Reserve Ration (CRR) has been lowered to 4.75% from

5% and this change will leave the commercial banks with an additional Rs. 30 billion to

lend. Significant capital inflows from Indians overseas have boosted the level of foreign

reserves and increased their liquidity. There are predictions of another bank rate cut in

2003. Exhibit 2.2-A depicts the state-wise per-capita income levels.



2.3 India: Fiscal Policy

According to the IMF, India’s gross (central government) fiscal deficit is expected to rise

to 5.6% in 2002/03 from 4.7% in 2001/02. Its consolidated fiscal deficit (including the


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deficits of state governments, the central government and public-sector undertakings) is

estimated to have been around 10% of GDP since 1997/98. The indirect tax task-force

proposed that service taxes be integrated into the value-added tax (VAT) system; the

states have agreed to move over to the VAT system from April 1st, 2003.



2.4 India: Economic Indicators

2.4.1 GDP

The Economic Intelligence Unit forecasts India’s Real GDP growth rate for 2003 to be

5.9% and estimates that it will increase to 6.7% by 2004. In contrast, the world GDP

growth rate is forecasted to be 3.1% in 2003 and 3.8% in 2004.

GDP3                 Figures

Total (PPP)          $2.66 Trillion



Real growth rate     4.3%




Per capita           $2,540
(PPP)




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2.4.2 Currency Exchange



The Indian Rupee has been appreciating in

value against the US Dollar since June,

2002 with the recent exchange rate at 1USD

= Rs. 47.35 as of April, 2003. This is the

most prolonged period of appreciation in

recent years and stems partly from USD

weakness and also from higher foreign

investment inflows and a surge in

remittances from Indians overseas. The

gradual depreciation of the Rupee is

expected to resume soon with the central

bank playing an active role in the markets to

ensure that exchange-rate developments do

not damage India’s competitiveness.



2.4.3 Inflation

Consumer price inflation averaged 4.2% in 2002 and it is expected to rise to an average

of 4.8% in 2003. Inflation in the past few years has been low by historical standards and

the recovery in the industrial sector is likely to push it up.



2.4.4 Foreign Exchange Reserves




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Indian Forex reserves are at $74.751 billion as of April, 2003, up from $54.805 billion in

April, 2002.



2.4.4 Balance of Accounts

Despite the global economic slowdown, Indian IT services exports which are well

positioned to “compete on price” are forecasted to record a sustained surplus. Tourism

receipts, which have been falling, are likely to stabilize. As a result of these factors,

India’s current account is forecasted to record a surplus of 0.5% of GDP in 2003.

Appendix 2.1-A gives an indication of India’s economic structure.



III. ANALYSIS OF THE BUSINESS INVESTMENT CLIMATE AND BUSINESS

PRACTICES

The Globalizers

       During the last decade, the world saw a trend in which many countries started

moving towards rapid integration into the global economy with China, Brazil, Mexico,

India, Thailand, Malaysia and the Philippines leading the way. While these aggressive

“globalizers” saw an average GDP rise of over 5% per year during this period, it should

be noted that there are some marked differences in their performances. Although China

was the undisputed leader in this group with an astounding average growth in its per

capita GDP of over 8% a year, India saw a respectable per annum growth of about

5.8%i. China and India had comparable GDP per capita incomes measured at PPP of

about $1,400 in 1990, but today, China’s figure is around $4,200 while India’s remains at

about $2,800 (PPP adjusted)ii. In terms of FDI for the year ending 1999, China saw

impressive FDI inflows at 3.9% of its GDP, Thailand an even greater 5% of its GDP

while India’s was a paltry 0.5%iii. These facts combined beg the question: “what

accounts for the significant differences in the performances of these various countries


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and in particular what factors in the investment climate of India are being reflected by

these numbers?”



Arguments for Investing in India

   India has over 1 billion people with a rapidly growing middle-class of around 300

million and is the fifth largest economy globally (PPP adjusted), with close to a fourth of

the world urbanized population, a third of the world’s population living under a

democracy, the second largest among the developing economies and the first massive,

complex country to transit successfully from a controlled socialist economy to a

globalizing market economy without massive outside helpiv. In 1991, India inaugurated

the New Industrial Policy (NIP) Resolutions, which made significant changes in the

conduct of trade, industry, foreign investment, finance, and taxationv (see appendix).

Today, private investment is encouraged in all but a few industries (defense, postal,

rails) and foreign investment is considered equal to and as welcome as its domestic

counterpart. The Indian market surpasses China’s in sophistication, openness,

internationalism and transparency and the country has an uninhibited press, a judiciary

that can and often does overrule the administration, a modern if slow legal system,

international standards of accounting, and a strong research and academic

infrastructure, with Indian educational institutions producing upwards of 175,000

scientists and engineers a year. Private business accounts for 75% of GDP and there

are considerable opportunities for joint ventures, franchises and licensing agreements,

although sole proprietorships owned by foreigners are currently more limitedvi. In short,

the many up-sides to investing in India can be summed up in the following list:

   •   The third largest pool of technical and scientific personnel in the world

   •   An English-speaking professional workforce

   •   Highly attractive wages by international standards


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   •   Sophisticated marketing and informational services

   •   A strong, if time consuming, legal framework

   •   Well-regulated capital markets and a highly regulated securities industry

   •   Further liberalization and deregulation of business, trade and foreign investment

       in the worksvii

   •   Flexible exchange rate regime offering full convertibility of current account

       transactions with full repatriation benefitsviii

WTO Regime and Its Impact on the India

       Excessive use of anti-dumping measures by major industrialized countries has

made it imperative for developing countries to set-up anti-dumping measures

themselves. India has argued that the strengthening of anti-dumping measures would

run counter to the basic principles of liberalization and would signal a return of

protectionism under a different garb.ix One of the important features of India’s Export-

Import policy of 2000/01 is that it marks the final phase of the removal of quantitative

restrictions on imports maintained for balance of payment reasons. This withdrawal was

carried out in two phases with 715 items in March of 2000 and an additional 714 items in

March of 2001.

Areas of Concern for Investors

Entry and Exit Barriers

       Although labor productivity adjusted for wages in India compares favorably with

other countries in labor-intensive sectors, there is a very high level of productivity

dispersion in India. For example, in the textile, garments and electronics sectors, higher

performers have value added per worker that is five times that of lower performers (in

South Korea that ratio is two and in Thailand just below three) indicating that many

inefficient and uncompetitive firms continue to operate in India without much




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consequencex. One reason for this is that there is tremendous political pressure on

businesses to maintain large labor forces and with some of the most restrictive labor

laws on the books, the hiring and firing of workers is notoriously difficult, with a typical

firm reporting 17% more workers than desired (see appendix for Peugeot’s troubles in

Mumbai)xi.

       In addition, the average number of permits needed to start a business in India is

estimated at no less than 10 (compared with 6 for China), with a “broker” needed every

step of the way to ensure timely approvalxii. The most egregious example of

bureaucratic overkill, according to the Confederation of Indian Industry reports, is that a

typical foreign power project needs to obtain 43 clearances at the central government

level and an additional 53 at the state level. At the other end of spectrum, bankruptcy

proceedings in India can be just as cumbersome as evidenced by the fact that it is

entirely common for a case to take two years in the courts and an amazing 60% of

currently pending liquidation cases before the High Courts have been in process for

more than 10 yearsxiii.

       Another factor making entry into the Indian market a challenge is the restrictions

and regulations on the use and transfer of land and, according to McKinsey & Co., land

market distortions account for 1.3% of lost growth per year in India. These distortions

include unclear ownership (90% of land parcels are in dispute, taking decades to settle),

inflexible zoning and tenancy laws, and counter-productive taxationxiv.

Infrastructure

       Although India has put a fair share of its resources into transportation

infrastructure during the past decade, the country still lags behind its East Asian

neighbors. The percent of paved roads in India is around 56, which is considerably

lower than the 88% in East Asia and more importantly, for the fiscal year 2001, the total

container volume passing through all Indian ports combined was less than that of


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Shanghai alone and the shipping costs per container to the US (for textiles) was 20%

higher for India as compared to Thailand and 35% higher than that of China’sxv.

       Access to reliable power at a reasonable cost remains a big problem in India with

shortfalls in supply estimated at 11% for regular and 18% for peak periods (although

these numbers vary substantially across different regions) necessitating 69% of Indian

firms to provide for their own generators as sources of emergency power supply.

Other Impediments to Business

       Although China and India are seen in a comparable light in terms of corruption

and India is perceived in a far better light when it comes to the rule of law, it should be

noted that there are additional areas of concern regarding the Indian business climate

for investment. For instance, an Indian manager is estimated to spend 16% of his/her

time dealing with government officials (as opposed to 9% in China and 11% in Latin

America), keeping him/her away from primary functions, thus adding considerable

opportunity costs on his/her time. Moreover, 90% of Indian firms reported having to

make irregular payments to these same officials as well. More importantly, it is found

that an average container remains in Indian customs 50% longer than Thailand’s (almost

three times longer than the developed world’s) and that the longest delay in the past

year for a typical firm in India was 21 days compared to only 12 in Chinaxvi.

       In sum, it should be noted that while India represents tremendous opportunities

for investors as well as substantial reasons for concern, there are major differences by

region and that by some estimates, if some of the best of Indian practices as seen in

Maharashtra, Gujarat and Tamil Nadu were adopted by all other states, India could see

a GDP increase of 1.5 to 2 % along with a sizeable net increase in FDIxvii.




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GOVERNMENT REGULATIONS

    1. AUTO POLICY 20021

In March 2002, the government of India announced its new auto policy. The salient

features of the policy are:

•   100% FDI allowed in the auto sector;

•   import tariff to be designed to give maximum fillip to the manufacturing in the country,

    without giving undue protection;

•   anti- dumping duties to be put in place;

•   production of small cars of length less than 380cm to be encouraged with the aim of

    making India an Asian hub for export of small cars;

•   fiscal incentives to be provided to MUV sector; and

•   rebate in the excise duties to be considered as an incentive for expenditure on R&D



    2. FISCAL POLICY2

•   IMPORT POLICY: Import of passenger cars and other automotive vehicles is restricted

    and an import license is required for these items. Import of capital goods and

    automotive components/ parts come under Open General License (OGL) and so,

    they do not require government approval.

•   EXTANT POLICY (SKD/ CKD3 IMPORTS): some ventures in the car sectors envisage

    initial import of cars in SKD/ CKD kits that requires a license from the Directorate

    General of Foreign Trade (DGFT). While the government has decided to grant the



1
  www. siamindia.com
2
  website?
3
  Semi Knocked Down and Completely Knocked Down condition


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    required license for the venture, they require the firm(s) setting it up to give import

    details about their import program, the indigenization planned, the export possibilities

    and the signing of a memorandum of understanding (MOU) with the DGFT in this

    regard. The underlying idea is to discourage low technology applications and to

    have assurances that the firm(s) have a long term commitment to the undertaking.

•   IMPORT DUTY: The import of cars under the CBU (Completely Built Unit) and two-

    wheelers attract a basic duty of 60%. The import of used cars is discouraged and

    carries a duty structure of around 180%. The imports of SKD/CKD kits have been

    pegged at 35%. The import of vehicles meant for the transport of goods including

    dumpers comes with a 40.40% rate. Special purpose vehicles- crane lorries, road

    sweepers, concrete mixers attract a duty of 62.86%. Specialized vehicles used in

    infrastructure construction projects are permitted duty free.

        Import of capital goods in the auto sector overall is attracting an import duty of

    25%. However, under the Export Promotional Capital Goods (EPCG) Scheme,

    capital goods can be imported on payment of concessional duty of 15% on taking an

    export obligation of four times the c.i.f value to be fulfilled in five years or zero down-

    payment on an export obligation of six times the c.i.f value to be fulfilled in eight

    years where the ci.f value of imported goods is C$6.33 million or more.

    Import duty on automotive accessories is 62.86%. The import duty on spark engines

    and components is 62.86%. The duties are inclusive of additional duties.

    Reduction in import of raw materials such as iron and steel, non-ferrous metals and

    plastics helped the auto sector in bringing down the cost of production.



•   EXCISE DUTY: In the budget of 2002-03, for vehicles designed for transport of 6-12

    persons, the duty is 25%. The duty for passenger cars is 32% and two-wheelers is




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    16%. Excise duty on auto components varies 25 to 30%. Excise duty on

    electronically operated vehicles is 8% and on bodies of motor vehicles is 18%.



    3. EMISSION NORMS AND ALTERNATE FUELS4

    The significant implications of vehicles emissions have led to emission control

regulations in conjunction with environment–friendly technologies to reduce vehicle

pollution.

    On the vehicle emission front, judicial activism has goaded the government to take

certain policy measures in the recent past which has led to stricter emission norms for

automobiles. In 1991 the first stage emission norms came into force for petrol vehicles

and in 1992 for diesel vehicles. India is behind Euro norms by a few years and vehicle

manufacturers are working to meet the Euro standards and Indian emission norms. As

per a Supreme Court judgment, banning registration of all non-Euro I compliant cars

within Delhi, all vehicles should become Euro I compliant by April 2000. As a result,

almost all the existing players and new entrants have started introducing models

complying with the said norms. This development has led to an increase in the prices of

cars, which by an estimate, could be anywhere between 10-15%. The Euro II equivalent

norms which came into effect in April 2001 required an extension to October 2001 for the

conversion of commercial vehicles to allow for the CNG dispensing infrastructure to be

put into place. However, emission reduction envisaged by emission norms can be

achieved only if fuel quality facilitates optimum operation of upgraded engines. Fuel

quality and vehicular technology work together to address the environment imperatives

and customer expectations.




4




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           The prices of petrol and diesel were regulated till recently by the government as

part of its policy on petroleum products management. However, since 1997, the prices

of these fuels have been deregulated and linked to the movements in international

prices. As a result, already, the price of diesel has been raised twice, the latest by a

very large 40%. This dismantling of the Administered Price Mechanism (APM) of

petroleum products will reduce the cost disadvantage of petrol driven cars.

Alternate fuels provide three distinct advantages over gasoline and diesel fuel. Main

fuels considered for automotive use are Natural Gas (CH4), Propane (C2H8), Methanol

(CH3OH), Ethanol (C2H5OH). The advantages are:

        Energy Independence            Alternate fuels are more likely to be produced from
                                       domestic resources

        Emission- SMOG                 Alternate fuels generally reduce vehicular
                                       emissions
        Fleet Operating Costs          Some alternate fuels such as CNG offer lower
                                       overall operating costs.



      4. ROAD INFRASTRUCTURE & TRAFFIC5

      Traffic on roads is growing at a rate of 7 to 10 percent per annum while the vehicle

population growth is around 12 per cent for the past few years. Poor road infrastructure

and traffic congestion can be a bottleneck in the growth of the vehicle industry. A

balanced and coordinated approach is proposed for proper maintenance, “upgradation”

and development of roads by encouraging private sector participation besides public

investment and incorporating latest technologies and management practices to take care

of the increase in vehicular traffic. Moreover, the government will also promote multi-

modal transportation and the implementation of mass rapid transport systems. The

government will duly amend the Central Motor vehicle rules, BIS (Bureau of Indian

Standards) and other relevant provisions and safety regulations that conform to global

5
    Auto Policy- Government of India


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standards. Also, inadequate parking has aggravated the problem of traffic. The

government will amend the laws and encourage multi-storied parking.




       5. INCENTIVE FOR RESEARCH AND DEVELOPMENT6

       The Indian government will promote Research and Development in the automotive

industry by strengthening the efforts of industry in this direction by providing suitable

fiscal and financial incentives. The current policy allows Weighted Tax Deduction under

I.T. Act, 1961 for sponsored research and in-house R&D expenditure which would be

further improved. In addition, vehicle manufacturers will also be considered for a rebate

on the applicable excise duty for every 1% of the gross turnover of the company

expended during the year on R&D carried either in-house under a distinct dedicated

entity, faculty or division within the company assessed as competent and qualified for

the purpose or in any other R&D institution in the country.

            The government will encourage setting up of independent auto design firms by

providing them tax breaks, concessional duty on plant/ equipment imports and granting

automatic approval.



IV. INDUSTRY SECTOR ANALYSIS

The “automobile sector” in India comprises all vehicles, including two- or three-wheelers,

passenger cars and multi-utility vehicles, and light and heavy commercial vehicles. The

“allied engineering sector” largely consists of the auto components sector. Agricultural

tractors and Earth Moving Machinery is an associated sector, which keeps the wheels of

the agrarian economy moving. It is heavily reliant and aligned to the automobile and



6
    Ibid.


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allied engineering sector and plays a significant role in India. The Automobile and Allied

Engineering Industries are alternatively termed as the “Automotive industry” in India.4



Note: In this report we are mainly focusing on the Automobile sector in India, and will

mention the other components of the automotive industry where required.



4.1 INDUSTRY SECTOR EVOLUTION

The current Automobile sector in India has evolved in four main phases namely,

   1. Introduction phase (pre-1983) – Protectionism Policies of the Indian Government

   2. Reformation phase (1983 to 1990) – Liberalized policy and entry of intense

       competition

   3. Deregulation & Growth phase (1991 to 2000) – Second phase of Liberalization

       and formation of joint ventures.

   4. Export oriented phase (the new millennium):




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                                          INDIAN AUTOMOBILE INDUSTRY EVOLUTIONARY PHASES

1. Introduction Phase (Protectionism policies)                                                 2. Reformation Phase (Liberalized policy and intense
   First car imported in 1928                                                                  competition)
   HM incorporated in 1942                                                                         First phase of liberalization of Govt.’s protectionism
   Premier Automobiles in 1944                                                                     policies.
   1953 Govt. decrees operate only firms with local                                                Entry of new foreign collaborations.
   manufacturing units – only 7 firms approved.1                                                   1983 – Maruti Udyog Ltd. Started in collaboration
   1960s & 1070s – 2/3 wheeler segment establishment                                               with Japanese firm Suzuki
   and growth                                                                                      By end of 1980, 5 passenger car manufacturers in
                                                                                                   India – MUL, HML, PAL, SMPIL and Sipani
                                                                                                   Automobiles.




4. Export oriented Phase                                                                     3. Deregulation & Growth Phase (Second phase of
    Some Indian manufacturers have joint ventures with                                       liberalization)
    foreign firms to export vehicles to other Asian                                              Introduction of new industrial policy in 1991 – death
    countries and Europe                                                                         of “License Raj”
    E.g.: Tata’s Telco and Range Rover are selling Indica                                        Introduction of Mass Emission Norms – in 1991 for
    cars in the United Kingdom                                                                   petrol vehicles & in 1992 for diesel vehicles
    Hero Honda and Bajaj export 2- and 3-wheelers to                                             Significant reductions in import duty on automobile
    foreign markets, including Latin American University                                         components in 1993
    Indian roads need to be improved considerably for a                                          Since 1993, automotive industry experienced growth
    surge in passenger vehicle demand                                                            rates of above 25% till the end of century
    Companies such as Maruti are losing market share to                                          1997 National Highway Policy announced
    MNCs such as Hyundai                                                                         Formation of many new joint ventures between
    Domestic consumers are gradually upgrading from 2-                                           Indian and Global automobile companies (refer
    wheelers to compact cars, economy to mid-size                                                Appendix 4.2 – A )
    vehicles, and from mid-size to luxury cars

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4.2 VEHICLE SECTORS

       The registered vehicle population in India is currently at 46 million and is growing

at a rate of more than 5% per annum. 35% of these registered vehicles are being used

in the urban areas. See Appendix 4.2 – B for charts on the statistics of the Indian

vehicle industry.



The Indian automobile industry is primarily divided into three sectors:

       Commercial vehicles

           o    Medium and Heavy Commercial Vehicles

           o    Light Commercial vehicles

       Passenger cars

       2/3 wheeler vehicles


                                              Indian Automobile Industry


          Three Wheelers    Multi Utility         Commercial    Passenger      Two Wheelers
                             Vehicles              Vehicles       Cars


                                                                Motor Cycles     Scooters     Mopeds
                      Passenger        Goods
                       Carriers        Carriers




While all the sectors of the automobile industry have done well in the last two decades,

during the last five years there has been a very high growth rate especially in the

passenger cars and 2-3 wheeler vehicles sectors.




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4.3 INDUSTRY STRUCTURE

4.3.1 INDUSTRY STRUCTURE IN PASSENGER CARS SEGMENT

       With the entry of new and international entrants, the Indian market after 1997 has

seen market segmentation gradually change with the profusion of new models and

introduction of newer variants of existing models.        This has resulted in micro-

segmentation of the market based on price.       The current industry structure of the

passenger-car segment in the Indian market is divided into four sub-segments:



Segment                                      Price Range

Economy Segment (Small Car)                  <= Rs.0.3M

Mid-Range Segment                            Rs. 0.3 to Rs.0.5M

Luxury Segment                               Rs.0.5 to Rs.1M

Premium Segment (Super-luxury)               > Rs. 1M



Each of these four segments is further micro-segmented on price parameters. For

example in the Economy segment there is the entry level Maruti 800 at the low end of

the segment, then comes the deluxe version of Maruti 800 and petrol Indica in the mid-

price end and the entry level Matiz, Santro and Zen form the high end of the Economy

segment Similarly in the mid-range segment, the lower end is made up of cars of the

likes of Maruti Esteem, Fiat Siena, Opel Corsa, and Ford Ikon. The higher end of the

segment includes Opel Astra, the Maruti Baleno, the Hyundai Accent, the Daewoo

Nubira and the Mitsubishi Lancer. This micro-segmentation is strictly based on price

lines and vehicle sizes.5

       Such extensive segmentation aided the overall expansion of the car industry.

The wide choice and the option of graduating from one level to another increased the




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demand. Earlier, growth in the car industry came mainly from first-time buyers. Existing

car-owners had little incentive to change vehicles because of the limited choice and the

absence of a superior vehicle for upgrade. See Appendices 4.3.1-A, 4.3.1-B & 4.3.1-C

for charts.



4.3.2 INDUSTRY STRUCTURE IN TWO-WHEELERS SEGMENT

The current industry structure of the two-wheeler segment in the Indian market is divided

into the following three segments:

        1. Scooters             2. Motorcycles               3. Mopeds

See Appendix 4.3.2 for charts on production units for each segment.



4.3.3 INDUSTRY STRUCTURE IN COMMERCIAL VEHICLES SEGMENT

The “Medium and Heavy Commercial Vehicles” and “Light Commercial Vehicles”

together form the commercial vehicles segment.

The current industry structure of the Medium and Heavy Commercial Vehicles segment

and the Light commercial vehicles segment in the Indian market are divided into the

following categories:

        1. Trucks                            4. Agricultural vehicles

        2. Buses                             5. Earth movers/ Construction vehicles

        3. Multi-utility vehicles

See Appendix 4.3.3 for charts on production units for each segment.




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4.4 KEY DRIVERS/PARAMETERS

4.5.1 Demand

The “demand” for cars is dependent on a number of factors including:

   •    Per capita income

   •    Introduction of new models                            positively related to demand

   •    Availability and cost of car financing schemes

   •    Price of cars

   •    Duties and taxes

   •    Depreciation norms

   •    Fuel cost and its subsidization             inversely related to demand

   •    Public transport facilities



4.5.1 Supply

The “supply” of cars is dependent on the factors including:

    •   Government policies

    •   Excise duty

    •   Sales tax duty

    •   Competition in the sector



4.5 GLOBAL TRENDS IN THE AUTOMOTIVE INDUSTRY

4.5.1 Global Trends

The dominant global trends in the automotive industry are:

   •    Change in the global operating environment as indicated by the consolidation

        among automotive manufacturers (OEMs) and automotive components firms

        through high profile mergers and acquisitions



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   •   Global over-capacity, the principal reason for the rapid changes in the global

       automotive industry and the force behind the restructuring of the industry

   •   Increasing and intensifying competition

   •   Modularization and increased complexity of modules

   •   Price pressures

   •   New informational technologies (E-business development)

   •   Transformation of suppliers’ role and distribution in the automotive industry value

       chain leading to a change in the transformation of automotive retail.

   •   Decrease in profit margins

   •   Increased OEM and automotive component investment in certain geographical

       localities, despite global overcapacity

   •   “Tiering” of the automotive components industry due to lead source and

       modularization tendencies

   •   Platform consolidation resulting in decrease in the number of platforms used (In

       1994, 64 platforms were used in Europe versus 51 in 2000).

   •   Increasing importance of “Brand Management” in the automotive industry. E.g.:

       GM employed talented brand managers from P&G to monitor brand

       performance.



4.5.2 Indian Trends

The major trends affecting the Indian automotive industry in recent years are:

   •   Dominant basis of competition from price to price-value concept, especially in the

       passenger car and the two-wheeler segments; though the Indian market remains

       price-sensitive, the price-sensitivity is being prevailed by price-value concept




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•   Increased segmentation of the automotive industry, reflecting greater consumer

    sophistication

•   Demand saturation in the automotive sector resulting in excess capacity

•   Infrastructure bottlenecks such as inadequacy of road infrastructure are

    constraining growth of the automotive industry

•   Economic slowdown

•   Increasing competition from global giants

•   Increasing openness of the Indian economy necessitating the search for long-

    term sources of competitiveness

•   Increasing costs for OEMs as they are required to comply with increasingly

    stringent environmental regulations, pay higher dealer-margins, extend longer

    credit to dealers and high competition

•   Vertical integration in the components industry resulting in ‘systems and

    assembly suppliers’ rather than individual component suppliers; this has led to

    tierization of the component suppliers with individual suppliers integrating into tier

    2 and 3 suppliers while larger manufacturers and MNCs are being transformed

    into tier 1 suppliers

•   Increased concern for environmental and safety issues leading to higher safety

    and emission norms in India; (Target of EURO-II norms all over India by 2005

    and EURO-III norms compliance for the seven major cities)

•   Increase in disposal income and availability of low cost financing

•   Moving towards consolidation (strategic alliances between different companies)

•   Upgrading technology and enlarging product range

•   Accessing new market segments and markets

•   Cutting costs



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4.6 INDUSTRY ANALYSIS USING PORTER’S FIVE FORCES

Porter’s Five Forces of Competition:

Porter's "Five Forces of Competition" model views the profitability of an industry as

determined by the five sources of competitive pressure. These five forces of competition

include three sources of "horizontal" competition - competition from substitutes, the

threat of competition from entrants, and competition from established producers - and

two sources of "vertical" competition - the bargaining power of suppliers and buyers. The

following is a view of the Indian passenger car industry from these five angles leading to

the expected changes in the coming years in the underlying structure of the Indian

passenger car industry:




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                             Porter’s Five Forces Model of Competition




                                          Threat of New
                                            Entrants
                                           Economies of scale
                                           Government policy
                                           Huge capital costs


                                                                                      Rivalry between established
                                                                                              competitors
                                                                                       Highly concentrated industry
Competition from                                                                       Diversity of competitors
                                                                                       Product differentiation
  Substitutes                                                                          Excess capacity and Exit
                                              Horizontal                               Barriers
Inadequate public                                                                      Increase in working capital
transportation system
                                           COMPETITION

                                                Vertical



                                                                              Bargaining power of
    Bargaining power of                                                             buyers
         suppliers
                                                                                     Buyer’s price sensitivity
          Diminishing supplier power                                                 Relative bargaining power
                                                                                     Availability of easy financing
                                                                                     Used car market
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V. FIVE YEAR BUSINESS OUTLOOK

     Move toward bigger cars – Until three years back small-cars (economy) segment

     had the largest market share (~58%), but the current situation has changed as

     mid-size cars account for about 44% of the entire market, leaving the economy

     segment with 46%. As income levels are rise, the current car consumers in the

     small-car segment tend to buy the next level of cars which are the mid-size cars.2

     Rise in the second-hand car market – As two-wheeler users are presented with

     an option to update to cheap four wheelers available in the secondary car

     market, and the small-car segment users are presented with the option to shift to

     the next level of mid-size cars using the cheap second-hand cars, the secondary

     car market is sure to see a boom.

     Entry of global auto components suppliers which will result in a shake-out in the

     Indian auto components industry. This will result in consolidation of the auto

     components industry among the different tiers. This will also help the

     components industry in moving closer to the global quality standards resulting in

     higher exports.

     As the current automobile industry is experiencing excess-capacity problems and

     also being unable to take advantage of the economies of scale in production,

     consolidation in the automobile industry will result.

     More educated and demanding car consumers, resulting in the Indian automobile

     industry getting models and designs at global standards.

     Increase in exports by the domestic players as they produce better cars at global

     standards. E.g. TELCO in passenger cars and Bajaj in two-wheelers.




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Analysis:

      Size of the automobile industry: The Indian automobile industry with a gross

      turnover of about Rs 49,202 crore in 2000-01 constituted 4.12 per cent of the

      Gross Domestic Product (GDP) compared to 3.60 per cent in 1997-98. The

      estimated total auto industry size of Rs 54,000 crore for 2001-02 is only a

      marginal improvement over the previous year in terms of share in GDP. In

      developed economies, the average contribution by the auto industry to GDP

      exceeds 7 per cent.

      Total Market Cap: Today, with a market capitalization of Rs 15, 665 crore, the

      automobile industry stocks constitute about 5.73 per cent of the total market cap

      of the Bombay Stock Exchange (BSE) Sensitive Index (Sensex) and about 2.5

      per cent of the total market cap of the BSE.

      The advent of liberalization since 1991 opened up the Indian automobile market.

      The consumer is offered a better range of choice to choose from as a result of

      the increased competitive environment in which the industry is operating. The

      entry of the major global players brought in to the country well-established

      manufacturing techniques and improved quality. This foreign competition and

      influx of manufacturing technology and techniques have helped the domestic

      auto industry players as they now not only successfully develop, manufacture

      and market vehicles in India but also are making roads into the global markets

      through exports. For e.g. TELCO exports its cars to Europe and also middle-east

      in the passenger-car segment while Bajaj is also seeing increase in its exports of

      two-wheelers to the middle-east and the European countries.

      During the recent years the auto components industry in India has seen a major

      change as it is coming closer to the global industry standards in terms of quality.

      The global players in India played a major role in shaping this auto components


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industry in India. Currently, the low cost of trained labor in India is attracting

several foreign auto components manufacturers to India. For e.g. Delphi is

planning to set up units in India. This will not only help the domestic components

industry in reaching the global standards but will also boost its growth. Also,

China which is known for its cheap and quality products, is right now in a rapid

growth stage which is causing its domestic components industry to focus on the

local supply requirements. This offers India to take advantage the situation by

making the right moves in establishing a globally competitive components

industry, which will lock in the first-mover advantages.

Export-oriented nature of the industry: Though certain factors like low cost

trained labor force, increasing liberalization policies by the Indian government,

developing globally competitive auto components industry, rising income levels

etc. pose a rosy picture for the Indian passenger-car industry becoming export-

oriented, there are certain bottlenecks which India has to grapple with before the

local industry becomes ready for international expansion. The problems to

consider are:

    1. High costs as plants do not operate at levels which can take advantage of

        the economies of scale. Consider for e.g., the total annual sales of

        passenger cars in India is around 500,000 units which is less than a

        fourth of GM’s sales in U.S.

    2. Though India has a large and developing components industry which in

        the recent years is seen to be moving toward international quality

        standards, the industry is too fragmented (even with the level of

        consolidation seen in the recent years) with a wide variety of technologies

        in use for the manufacturing processes. As a consequence, the quality

        standards are not consistent.


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3. Governmental policies – though the Indian government has very largely

   liberalized the Indian automobile industry to attract a lot of foreign

   investment, there are still a large number of non-tariff and hidden barriers

   which pose a problem. The high incidence of taxes on automobiles which

   are still considered and taxed as a “luxury item” in India, have resulted in

   companies over-pricing the cars (relative to the Indian standards) and this

   has indirectly resulted in a suppressed demand. Because of this

   companies are unable to take advantage of economies of scale in

   production.

4. Exit Strategy – While the government has and is adopting policies for free

   entry by foreign players (100% FDI policies) into the Indian market, there

   is no good mechanism for players to exit the market. It is even seen to be

   difficult for companies to sell to other companies when the going is tough.

   For e.g. though GM has managed to take over all the international

   operations of Daewoo Motors, they have been unable to do so in India,

   resulting in a fully functional assembly plant lying idle.

5. Infrastructure bottlenecks: India has poor infrastructure facilities as can be

   seen in the over utilized and inefficient major ports, ill-equipped airports,

   bad roads and underdeveloped national highways, decreasing power-

   generating capacity etc. (World Economic Reform, Geneva in 2001

   placed India in the 50th position out of a sample of 53 countries when

   measuring competitiveness in terms of overall infrastructure

   development) 1

6. Trade unions and labor laws




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VI. CONCLUSIONS & RECOMMENDATIONS

Over the last decade, the Indian automobile industry has become more competitive.

India now has developed a skilled labor force in the automobile industry with the entry of

global players and also growth in the domestic industry. To analyze and conclude using

Porter’s competitive advantage model:

   1. Factor conditions: India is well equipped with a skilled labor force but it still

       lacks in the proper infrastructure required for the growth of the industry.

   2. Demand conditions: The demand has seen to have shifted along the segments

       and also has been seen to increase in the passenger-car industry, but still this is

       not sufficient enough generated to take advantage of the economies of scale in

       production.

   3. Related and supporting industries: India has well developed and mature steel

       and other ancillary industries required to support the automobile plants. And also,

       the auto components industry in India is witnessing a move toward global

       competitive and quality standards. This provides an advantage to the growth of

       automobile industry.

   4. Firm strategy, structure and rivalry: The nature of domestic rivalry in the

       Indian automobile industry is becoming increasingly intense as local companies

       like TELCO, Bajaj etc are becoming competitive in terms of international

       manufacturing and quality standards.

The Indian automobile and components industry are on their way to consolidation along

the lines of the global automotive industry. To remain competitive, the Indian auto

components industry needs to consolidate heavily (as it highly fragmented currently) to

face the likes of Delphi and Visteon who are planning to set base in India. This will also

result in a shake-out of the weak players, while the better ones try to come on par with

the global quality standards. This same trend if not at such a massive scale of


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consolidation, is to be witnessed by the automobile industry especially in the passenger-

car industry as companies consolidate to realize the economies of scale and take

advantage of the current and developing factor endowments in India. The Indian

government clearly needs to develop the infrastructure facilities if it wants to see its

liberalization policies having a positive impact. Also, the government needs to change its

tax policies which are resulting in a less-efficient industry with higher than possible

prices and thus lower market demand growth. Competing with China, which is a better

global investment attractor and player, is bound to happen to the Indian automobile

industry once China levels off in its demand growth which is right now keeping it from

attacking the global markets of the automotive industry. Therefore Indian automobile and

components players should make the best of the current situation in establishing

themselves and thus locking in the first-mover advantages.




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APPENDICES

Appendix 4.2-B



Vehicle Production (in Mil US$)           Vehicle Population (in Mil Nos.)




                                          Vehicle Exports (in Mil Nos.)
Vehicle Production (in Mil Nos.)




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Appendix 4.3.1 - A


         PASSENGER CAR PRODUCTION
700000                           (in Nos.)
600000                                              574369
500000    348146                401002
400000                                                              507306
300000                407539               390355
200000
100000
     0
         1995-96      1996-97    1997-98    1998-99     1999-       2000-01
                                                        2000



Appendix 4.3.1 – B




  Category                Examples of Models                        Market Share


  Economy segment         Maruti Omni, Maruti 800, Premier
                                                                    46.9%
  (up to Rs. 0.25M        Padmini
                          Premier 118NE, Ambassador Nova,
  Mid-size segment        Fiat Uno, Zen, Hyundai Santro,
                                                                   43.1%
  (Rs. 0.25-0.45M),       Daewoo Matiz, Tata Indica, Maruti
                          1000, Contessa
                          Peugeot 309, Tata Estate, Tata Sierra,
                          Maruti Esteem, Ceilo Executive, Honda
  Luxury car segment
                          City, Mitsubishi Lancer, Ford Ikon, Opel
  (Rs. 0.45-1M)
                          Astra, Fiat Siena, Opel Corsa, Daewoo
                                                                   10.1%
                          Nexia, Hyundai Accent
  Super luxury
                          Mercedes Benz and other imported
  segment (Above
                          models
  Rs. 1M).
Source : SIAM




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    Appendix 4.3.1 - C



           Company                                 Market Share

           Maruti Udyog                            52.4%

           Hyundai Motors                          14.4%

           Telco                                   9.9%

           Daewoo Motors                           11.5%

           Hindustan Motors                        3.9%

           Ind Auto                                2.1%

           Honda Siel                              1.7%

           Others                                  4.1%


    Source : SIAM


    Appendix 4.3.


    The following is a breakdown of production figures over the period 1996-2001 (total no of
    vehicles)


                         1996/97       1997/98        1998/99        1999/2000      2000/2001


Passenger Vehicles
                         542,133       535,615        503,795        701,551        630,592
(Cars, Jeeps, MUVs)


Commercial
Vehicles
                         237,254       160,964        135,823        173,469        152,079
(Trucks, Buses,
LCVs)

Two-Wheelers             2,980,303     3,072,749      3,374,498      3,778,011      3,929,321

Three-Wheelers           22,679        234,867        209,033        205,540        192,111



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Appendix 4.3.2




                      MOTORCYCLES PRODUCTION
 2500000
                                           (in Nos.)
 2000000
                                                                  2183430
 1500000                                                   1794093
                                         1125958
 1000000
                  809097                              1387276
  500000                     988709
          0
                   1995-96    1996-97    1997-98    1998-99      1999-     2000-01
                                                                 2000


                             SCOOTERS PRODUCTION
  1400000
                                             (in Nos.)
  1200000                                                            1259408
                              1322928 1279549          1315055
  1000000          1225895
    800000
    600000                                                                 879707
    400000
    200000
              0
Exhibit 2.1-A 1995-96          1996-97    1997-98    1998-99      1999-     2000-01
                                                                  2000




                             MOPEDS PRODUCTION
 740000
                                           (in Nos.)
 720000
 700000
                             668666                672167       724510
 680000                                                                    694974
 660000
 640000                                  667242
 620000
 600000           623114
 580000
 560000
                  1995-96    1996-97     1997-98    1998-99    1999-2000   2000-01




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Appendix 4.3.3



                   JEEPS/MUVs PRODUCTION
                                        (in Nos.)
     160000
     140000       134594                                                  125938
                                     113440
     120000
                             134613
     100000                                                   124310
      80000 67643
      60000
      40000
      20000
          0
             1995-96 1996-97 1997-98 1998-99                   1999-      2000-01
                                                               2000



                              M & HCVs PRODUCTION
                                           (in Nos.)
       160000
       140000    129731
       120000                152185                           114068
       100000                                                             88185
        80000
        60000                            95895      80452
        40000
        20000
            0
                  1995-96     1996-97     1997-98   1998-99   1999-2000   2000-01




                                  LCVs PRODUCTION
                                            (in Nos.)
       140000
       120000
       100000    129417
        80000                              65069
                                                              61213       63869
        60000                85069
        40000                                        55371
        20000
            0
                  1995-96     1996-97     1997-98   1998-99   1999-2000   2000-01




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                    3-WHEELERS PRODUCTION
                                   (in Nos.)
250000

200000                                                190259
         161679     221679      234867 209033
                                                                  203234
150000

100000

 50000

     0
          1995-96    1996-97     1997-98    1998-99    1999-2000    2000-01




                    TRACTORS PRODUCTION
300000
                                   (in Nos.)
                               256254                 257112
250000
         191311                            253850
200000
                    225525                                         231292
150000

100000

 50000

     0
          1995-96    1996-97    1997-98    1998-99    1999-2000    2000-01




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National Highway Network in India




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Location of Major vehicles manufacturers in India:




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Exhibit 2.2-A




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POLITICAL MAP OF INDIA




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Major policy changes


The major policy changes introduced since July 1991 include:


(a) Abolition of industrial licensing;


(b) Lifting of restrictions on the size of firms;


(c) A drastic reduction in the areas reserved for the public sector;


(d) Disinvestments of Government equity in public sector undertakings (PSUs) aimed at

eventual privatization of most of them;


(e) Liberalization of foreign investment regulations;


(f) Substantial liberalization of import tariffs;


(g) Removal of all quantitative restrictions on imports;


(h) Abolition of the office of the Controller of Capital Issues (CCI) and freedom to

companies to set premium on their share issues;


(i) Freedom to companies to raise capital abroad;


(j) Rationalization and lowering of excise and Customs duties; and


(k) A substantial reduction in corporate and personal income-tax rates.


http://www.bisnetindia.com/bisnet/index.htm




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Appendix 4.2-A
Local Company                 Foreign Company                Foreign Equity
                                                             Participation
Birla Group of Companies General Motors of USA               50%
(Hindustan Motors)
Premier Automobiles Ltd. Peugeot of France                   50%
Telco                    Mercedes      Benz      of          76%
                         Germany
DCM                      Daewoo Motor of S. Korea            91.23%
Mahindra & Mahindra with Ford Motor Company of               50%
                         USA

Sriram Industrial             Honda Motor                    90%
Enterprises                   Company of Japan
Ltd. with

Hindustan Motors with         Mitsubishi Motor Corp. of      10%
                              Japan

Sipani Automobiles with       Rovers Group Ltd. of UK        2.59%

-                             Hyundai Motor Company,         100%
                              Korea

Hero Cycles Ltd., Ludhiana    BMW Germany                    51%
with

Maruti Udyog Ltd. with        Suzuki                         50% , now 52%
                              Motor Co. Japan
Kamal Sabre Motors Ltd.       JD Automotive Design of        100% EOU
with                          South
                              America and Sabre
                              International Corp. of USA
                              (Sports Car)

                              Volvo AB, Sweden               100%
                              (Commercial Vehicles)

Premier Automobiles with      Fiat
                              Italy
Maini Amerigon Car            Amerigon Inc., USA &           54.25%
Company                       Asian Equity, U.K. (Electric
with                          Car)

M/S. Overseas Concept         Concept                        34.43%
Auto                          Industrial Management Ltd.,
Ltd., Chandigarh with         U.K

                              M/s Toyota                     74%
                              Motor Corporation, Japan


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Notable Changes in Indian Law by the New Industrial Policy (Page 54, Bullis)

   •   The limit for foreign equity participation was raised to 51% from 40% in 35 high-

       priority industries including industrial and agricultural machinery, chemicals and

       hotel and tourist facilities

   •   Up to 100% foreign equity is allowed in the power sector, electronic hardware

       technology and software parks, export oriented units and companies located in

       the export oriented zones.

   •   Importation of capital goods and plant machinery is automatically approved

   •   Significant reduction on import duties with most capital goods attracting tariffs

       between 20% and 40%. An export promotion capital goods scheme permits the

       importation of capital goods at a concessional 15% duty.

   •   The requirement that foreign investment must be accompanied by technology

       transfer has been abolished. In some 35 high priority industries, automatic

       clearance has been given to agreements involving a lump-sum investment of Rs.

       10 million and higher.

   •   Free repatriation of profits and capital investment is permitted, except for a list of

       specific consumer-goods industries that are subject to dividend balancing against

       export earnings

   •   Exporters and other foreign exchange earners may retain up to 25% of their

       income in foreign currencies; 50% for companies in export processing zones and

       100% for export-oriented units.




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Appendix B

Peugeot in India; A Case Study in Labor Relations Gone Wrong (pp. 143, Bullis)

       Peugeot’s and Fiat’s Indian partner Premier Auto had two factories in Mumbai,

and during its 1996 contract renegotiations, Premier wanted to trade high-wage

increases and production-related bonuses for control of production and wages that

would bring it into competitive alignment with other Indian auto makers. Union troubles

began when Peugeot insisted on enforcing long-ignored safety rules mandating that

sheet metal presses be operated with both hands. The Peugeot dispute delayed parts

being sent to the Uno factory, which in turn led to production and bonus disputes and

eventually lockouts at both factories (Fiat and Uno). Some workers crossed picket lines

and returned to work, but production stopped for several weeks.

       Dr. Datta Samant, the union leader, saw union disputes as a lever against foreign

investment, arguing that FDI will lead to lower pay and layoffs, and used this dispute to

rebuild his dwindling appeal. After much rancor and bitter accusations, the dispute was

resolved and fortunately for Premier, it occurred while production was well below

intended production capacity levels of 120,000 units per year, at which time losses

incurred by the disruption would have been ruinous. But the lesson for overseas

business people was quite clear: Look as carefully at the management style of local

union leaders as you do the style of the management where you plan to invest.


J.D. POWER RATINGS

J.D. Power Asia Pacific is an international marketing information firm operating in

business sectors including market research, forecasting and customer satisfaction in the

Asia region. They offer both industry-wide syndicated studies and customized ad-hoc

studies in key industries such as automotive, IT, finance, travel and service.




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The JD Power surveys are the Oscars of the automotive world. Founded by an ex-GM

employee, James David Power III, the company commenced customer surveys on

American-sold automobiles in the 1960s.



JD Power's modus operandi is extremely effective. The detailed responses of thousands

of car owners about their vehicle are compiled and collated in a report. These obviously

form an extremely powerful medium as what the potential car buyer is ideally looking for

is an accurate representation of the ownership experiences.



JD Power helps in communicating the 'Voice of the Customer' to automobile

manufacturers and dealers around the world. JD Power has developed statistical

programs to transform the responses of customers into meaningful indices that measure

the performance of vehicle manufacturers in the areas of dealer service, vehicle quality,

and product performance.



The major studies are:

   •   IQS (Initial Quality Study)

       J.D. Power's IQS study uses (PP100) problems per 100 vehicles as a measure

       of initial quality, with a lower score reflecting better quality. A score of 225

       signifies 225 problems reported per 100 vehicles. Following corporate policy, J.D.

       Power does not release the scores of models scoring below the industry

       average. The table below shows the IQS for the vehicle segment in India for

       2001.




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•   CSI (Customer Satisfaction Index)

    The CSI study examines customer satisfaction with vehicle quality and dealer

    service at 12-18 months of ownership. CSI performance factors are problems

    experienced, service advisor, service performance, service timing and facility




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appearance. The CSI Survey for Indian cars for 2002 gives the following results:




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•   SSI (Sales Satisfaction Index)

    The J.D. Power SSI Study is a consumer-driven measure of customer

    satisfaction with the vehicle sales and delivery process. According to the study,

    there are six major factors impacting satisfaction with the dealership at the time

    of purchase. They are Sales Experience, Explanation at Delivery, Price

    Evaluation, Delivery Timing, Salesperson Knowledge and Post-Delivery Contact.

    The table below shows the SSI Study in India during 2002.




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•   APEAL (Automotive Performance, Execution and Layout)

    This study is based on responses from new-vehicle owners and measures what

    excites and delights them regarding their vehicle's features and design. Overall

    performance is assessed for eight vehicle factors: engine/transmission;

    cockpit/instrument panel; ride/handling; heating, ventilation and cooling; comfort

    and convenience; sound system; seats; and vehicle styling/exterior.



•   CFS (Consumer Financing Satisfaction Study)

    CFS is a measure of customer satisfaction with the entire finance process among


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    new-car buyers at one to six months of ownership. Performance is measured by

    four factors that determine satisfaction. These are application process, approval

    and documentation, finance advisor and loan value. Application process

    evaluates attributes such as speed of completing the application process, ease of

    filling out paperwork, variety of loan plans offered, and lack of hassles during the

    finance process. Approval and documentation relates to speed of approval, ease

    of resolving problems, and degree to which loan meets individual needs. Loan

    value, which evaluates competitiveness of interest rates and other aspects of the

    loan term, contributes least to satisfaction with the finance process. The financial

    institution which gets the highest score is ranked as number one.



•   TCSI (Tire Customer Satisfaction Index Study)

    The J.D. Power Original Tire Customer Satisfaction Index Study examines owner

    evaluations with tires that were originally fitted in the vehicle at the time of new

    car delivery. This does not necessarily mean original equipment tires since some

    buyers have a tendency to change tires at the time of delivery. The overall

    performance is assessed on fifteen attributes, grouped into four factors:

    appearance, wearability, traction, and highway performance. A higher score

    reflects better quality.




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CHINA – COUNTRY PROFILE




Population     1.27bn (2001)
Population     0.9% (2001)
growth
Land area      9.6m sq km
Fiscal year    Starts on January 1st
Currency       Renminbi or yuan (Rmb)
               Rmb8.277:US$1 (2002, average)
               Rmb8.277:US$1 (April 17th 2003)
GDP            Rmb9.6trn (2001)
               US$1.2trn (2001, at market exchange rates)
               US$5.5trn (2001, at PPP)
GDP growth     7.8% (average, 1997-2001)
               7.5% (2001)
GDP per head   US$910 (2001, at market exchange rates)
               US$4,340 (2001, at PPP)
Inflation      -0.4% (average, 1998-2002)
               -0.8% (2002, average)




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Background

The People’s Republic of China was founded in 1949 by the Chinese Communist Party

(CCP). The CCP chairman, Mao Zedong, then led the country for nearly three decades.

After gaining power in 1978, two years after Mao’s death, Deng Xiaoping introduced

economic reforms, in the process consolidating his paramount authority. In 1989 Deng

brought in Jiang Zemin, who, until he formally began to retire in November 2002,

presided over a more collective leadership. The CCP is now led by Hu Jintao. A new

government was elected in March 2003. Mr Jiang remains influential.

Political structure

The CCP dominates the government. Mr Hu is general secretary of the CCP and state

president. Mr Jiang is chairman of the Central Military Commission, which controls the

armed forces. Wen Jiabao leads the government as premier. The standing committee of

the political bureau of the CCP is the ultimate policymaking body. The National People’s

Congress (NPC) is the largely rubber-stamp legislature. The Chinese People’s Political

Consultative Conference (CPPCC) groups political, social and religious constituencies

within a showcase, powerless institution. There is no formal political opposition to the

CCP; dissent is firmly suppressed.

Policy issues

China’s leadership desires continuing economic liberalisation and sustainable growth,

but also enduring and pervasive political control. Reform of loss-making state-owned

industry and the indebted financial sector is essential, but risks generating social unrest.

The government is trying to address widening income disparities between rural and

urban areas. By signing up to strict World Trade Organisation (WTO) entry terms, the

government is forcing the pace of reform and breaking down resistance from vested

interests. It is also giving more room to private interests, which may now compete more

effectively with state-owned enterprises for markets and resources. Foreign competition


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adds further pressure for state sector restructuring, although the impact varies by sector.

Foreign trade

In 2002, according to customs data, merchandise exports were US$325.6bn, and

imports US$295.2bn, leaving a surplus of US$30.4bn. On a balance-of-payments basis,

the trade and current-account surpluses totalled an estimated US$45.1bn and

US$35.1bn respectively.




Leading markets 2002         % of total     Leading suppliers 2002        % of total


US                           21.5           Japan                         18.1


Hong Kong                    18.0           EU                            13.1


Japan                        14.9           Taiwan                        12.9


EU                           14.8           US                            9.2




Major exports 2002             % of total         Major imports 2002             % of total
Apparel & clothing             12.7              Electrical equipment &          18.8
                                                 parts


 Computers                    11.1               Chemicals & products            13.2
 Telecommunications           9.8                Crude oil & fuels               6.5
products
 Electrical equipment & parts 9.8                General machinery & parts       4.1


Taxation

All enterprises pay a 33% tax on profits. Preferential rates apply in the special economic

zones (15%), the 14 coastal open cities (25%) and the 52 state-approved economic and



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technological development zones. The corporate tax regime is likely to be revised in

2003 and some preferential rates will be ended. Inland areas receive preferential tax

treatment compared with coastal regions.




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THE CHINESE CAR MARKET

China is currently the fastest growing car market in the world. In fact, vehicle sales more

than doubled in the first quarter of 2003 and are expected to reach 3.6 million up from

3.1 million in 2002 with an annual growth rate of 13%7. There has been an increase of

109% percent in the car sales, including SUVs, in the first quarter as compared to the

same period last year8. China’s entered into the World Trade Organization (WTO) in

2001 thereby agreed to lower trade barriers and ease foreign investments thus resulting

in the sudden growth in the car market. With US showing signs of slowing growth, most

major foreign manufacturers either have or are in the process of establishing joint

ventures in China to tap this potentially lucrative source of growth.

Although the total car sales in China are equal to just three weeks of sales in the US this

year, this has not stopped the world’s big auto makers from piling into the country. The

market is liberalizing under the terms of China’s World Trade Organization membership,

prices are falling, competition is rising and the government is keen to develop a ‘pillar

industry’- long term prospects are bright.

Nine of the world’s top auto makers, including GM, Ford, Daimler-Chrysler, Volkswagen,

Toyota, Renault-Nissan, PSA, Honda and BMW, have all accomplished their preliminary

strategic planning in China in 2002. Volkswagen dominates the market although its

market share has fallen from 55% to 41% in the past two years.

The convergence of a number of factors has convinced auto manufacturers that China is

the market of the future. First, China’s increasingly wealthy population has benefited

from China’s rapid economic growth over the past couple of decades. Disposable

income has increased significantly over the years especially in the coastal areas of the

country. The focus of the population is on the lower- priced segment of the market.


7
    Economist Intelligence Unit
8
    Automotive Resources Asia


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Other factors that ensure continued strong growth of China’s automobile market are

aggressive product roll-outs, competitive pricing and expansion of debt and financing

schemes being offered by auto manufacturers.

Perhaps the most important boost to the long-term prospects will come from increasing

government support to the industry. Lowering of tariffs on imported components and tacit

support to private financing schemes would help maintain a healthy demand for new

vehicles.

The impact of SARS virus might temper car purchases, along with other private

consumption, in the second quarter. But all the elements underpinning the present surge

in sales remain intact: higher incomes, cheaper cars, more models, aggressive

marketing, access to finance through local banks, increase in government support and

above all, a growing desire of ordinary Chinese to own their own cars. This combination

has made automakers very optimistic about China’s future potential.




References:

Primary Research:

1) Interview with Mr. Juan Callieri, Automotive Industry Specialist, International Finance
   Corporation, The World Bank Group, Washington, DC, April 24, 2003.

2) Interview with Dr. Alok Sheel, Economic Counselor, Embassy of India, Washington,
   DC, May 1, 2003.

Secondary Research:

   1. The Economist Intelligence Unit
   2. Economic and Political weekly, Nov 2001
   3. “Session II: The Automotive Outlook for India”
      Dr. Bibek Debroy, Director, Rajiv Gandhi Foundation and
      Mr. Murad Ali Baig, Auto Industry Expert and commentator
   4. China automotive : Chinese car market set for record year – Financial Times
   5. China automotive: Full throttle ahead for automakers- Executive briefing
   6. Global automotive outlook : Close to the edge- Executive briefing



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      7. Nine Global Auto Giants Go into Orbits in the Chinese Market – SinoCast via
          COMTEX
      8. The Economist Intelligence Unit – Country Report of India, 2002
      9. National Highways Authority of India
      10. CIA World fact book 2002 – India
      11. “Automotive Industry in India” , 2001
      12. www.aiacanada.com
      13. “Passenger cars: Jostling on a wide road”
      14. Investment world, The HINDU Group of Publications, April, 2003
      15. http://www.icraindia.com/samples/comment.htm


i
   www.worldbank.org (http://64.4.8.250/cgi-
bin/linkrd?_lang=EN&lah=51ad2e98ffa7fbbbdd2838fe5237f5dd&lat=1051481279&hm___action=http%3
a%2f%2frru%2eworldbank%2eorg%2fcountryassessments%2fdocuments%2fIndia%2findia%2dfinal%2ep
df)
ii
    http://www.imf.org/external/pubs/ft/survey/2002/021102.pdf
iii
    www.worldbank.org
iv
    Doing Business in Today’s India, Bullis pp. xiii
v
    Doing Business in Today’s India, Bullis pp.2
vi
    Doing Business in Today’s India, Bullis pp.154
vii
     Doing Business in Today’s India, Bullis pp 55
viii
     http://www.imf.org/external/pubs/ft/wp/2001/wp01192.pdf
ix
    www.ris.org.in
x
    www.worldbank.org
xi
   Doing Business in Today’s India, Bullis pp.143
xii
     www.worldbank.org
xiii
     www.worldbank.org
xiv
     www.worldbank.org
xv
     www.worldbank.org
xvi
     www.worldbank.org
xvii
      www.worldbank.org




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