Indian Car Sales Powering Ahead But Challenges Await

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China isn’t the only vibrant car market it would seem, although lagging a long way behind China in terms of total numbers, India’s growth rates have been stellar this year and unlike China which is showing signs of cooling over the last month or so India is still expanding as rapidly as it can. Indian domestic car sales rose 38% to 158,764 in July, compared with 115,084 in the same period last year, according to the Society of Indian Automobile Manufacturers quoted in an FT article.

Meanwhile China’s car sales rose 13.6%, a sharp drop compared with a 63.2% rise in March this year.

India’s growth in car sales has been fueled by a wider recovery as the economy has grown at 8.5% and a revival in credit as private finance companies have come back into the market after an 18 month absence. As credit has becomes more readily available, car makers have rushed new models to market like Volkswagen Polo, Nissan’s new Micra and Ford’s Figo all very much in India’s mainstream B (small car) segment.

Further expansion in the short term though is looking harder to achieve. The industry has several potential challenges ahead of it. First, the economy is growing so fast and agricultural inflation is becoming such a worry that the government is expected to continue to raise interest rates. So far this has not had much of an impact on buyers but if rates rise further it will dissuade price sensitive Indian buyers. Maruti, India’s largest car-maker is already facing production constraints opening up the market for foreign rivals to take a wider share. None of the car-makers, and that includes Ford, Volkswagen and General Motors, are operating at full capacity, not because of lack of demand but because of component supply constraints. India suppliers have not shown the same degree of flexibility and confidence as Chinese component suppliers to invest into the rising demand curve. Consequently, component shortages will continue to hamper growth.

As an India Times article observed, the market is also bracing itself for the arrival of ultra cheap cars. Tata Group has already opened their dedicated car plant in western Gujarat with capacity for 250,000 new cars a year. In a market of less than 2m passenger vehicles per annum that’s a very significant increase. Ultra cheap cars like the Nano will poach buyers from both the lower end of the car ranges, for buyers looking for value or who may otherwise buy pre-used, and from buyers who would otherwise only consider a motorcycle, the preferred method of transport for most Indian families.

Sales of trucks and buses, often taken as a measure of overall economic activity rose at an annual 37% to 51,481 units in July while Maruti’s sales rose 29% and Tata’s 41%. Motorcycle sales however rose 30% to 710,261 units for the month of July alone, dwarfing car sales 5 to 1, and illustrating what a phenomenal market India presents for cars like the Nano if Tata can get it right.

–Stuart Burns

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