Part of the problem for European automakers is their inability to lower their manufacturing costs through economies of scale. With Maruti Suzuki capturing 44 percent of the market and Hyundai another 16 percent, the remaining dozen or so car brands are competing for a little more than one-third of the market. Subtract the premium players and that leaves about 800,000 unit sales that are split 12 ways. The bulk of that volume is in the extremely cost-competitive small and minicar segments.
“That’s a very small, very fragmented pie that is being divided up. So if the market becomes sluggish then earnings will be very badly hit,” said Mohit Arora, executive director at J.D. Power Asia Pacific. “I don’t think many of the European or even American manufacturers in India are profitable at this time.”
In an attempt to gain scale, carmakers are forced to turn their Indian plants into export hubs. VW, for example, now sells the Vento in 32 other markets, such as Mexico, just to keep the plant operating at about 75 percent capacity utilization, a level generally seen as needed for a factory to break even. Roughly half of all production out of VW’s Pune plant is destined for overseas markets this year.
Another problem is the unique difficulties and pitfalls associated with running a business in India, a country whose recent rapid growth masked deep-seated structural problems in the broader economy and the transport sector more specifically.
Home to 1.2 billion people and Asia’s third-largest economy, India has long been regarded by carmakers as the next China because of the emergence of its overwhelmingly young and educated middle class. While the country’s untapped potential is massive with about 20 cars per 1,000 people – less than half the level of China – poverty remains rampant. India’s per capita income rivals parts of sub-Saharan Africa and one-third of the world’s poor live in the country. Fuel costs remain a major concern, leading to the widespread popularity of thrifty diesels and minicars. Road building can’t keep pace with car sales, poor surfaces and traffic conditions require dealers to maintain a robust spare parts and service network, and congestion effectively serves as a natural bottleneck for demand. “The country’s infrastructure needs are massive,” the World Bank said in a report.
Because so few people own cars, tastes have yet to mature, which makes it difficult to predict the behavior of Indian car buyers. It’s easier to make a splash with a single model like the Duster. India’s own Tata Motors got it horribly wrong when it made a huge bet that families traveling on the back of a single scooter would happily trade in their two-wheeler for the comfort of a car if they could just afford one. Tata’s visionary answer, the Nano, flopped as buyers feared the stigma attached to a vehicle marketed as the “world’s cheapest car.”
Carmakers complain that much of the difficulty stems from India’s own inflexible bureaucracy, chronic lack of supply-side reforms, numerous tariffs and a government resorting to whatever means necessary to boost tax revenue. A study published by the McKinsey consultancy in February, for example, criticized India’s complex and archaic regulations, “balkanized” tax regime, and web of at least 43 national laws and many more state laws governing labor conditions. “India’s manufacturing sector is characterized by a glut of sub-scale, low-productivity enterprises,” McKinsey concluded.
Companies with more than 100 employees on their payrolls need to obtain government approval for layoffs, which encourages the harmful creation of a two-tier work force that sparks social tensions between permanent staff and their lower paid contract brethren. “India loses more days every year as a result of strikes and lockouts than any other country,” employer association AIOE wrote in a study published in 2012. Only weeks later, fresh clashes at a Maruti Suzuki plant claimed the life of an HR official, the fourth auto industry manager to die at the hands of his own employees since 2008.
‘Nothing to offer’
While Volkswagen enjoyed an initial boom thanks to the Vento and Rapid, growth began to stall in 2012 after management failed to spot a key trend that emerged due to changes in the regulatory environment. To reduce traffic on congested roads and gain control of widening fiscal and trade deficits by cutting down on subsidies and crude oil imports, the Indian government lowered excise duties for vehicles shorter than 4 meters and equipped with small engines. Carmakers such as Maruti Suzuki picked up on that, launching the popular Dzire notchback.
“After the change in the regulatory environment, the two fastest-growing segments in the Indian car market are sedans and SUVs below 4 meters and we currently have nothing to offer,” a VW source said. While other import brands are already succeeding with their sub-4 meter cars, such as the Honda Amaze sedan and Ford EcoSport SUV, Wolfsburg could only muster up the Taigun SUV study at the Delhi auto show earlier this year. Worse, VW has been slow to offer a competitive diesel. Only with the July launch of the refreshed Polo hatchback did VW start offering a 1.5-liter turbo-diesel specially designed to fulfill Indian excise tax requirements. VW just announced it would soon start building the motor in Pune in order to avoid incurring import duties.