Indian Passenger Vehicle Manufacturing Capacity to Reach 5.42 million Units by 2014

The Indian passenger vehicle market is expected to grow at a compounded annual growth rate of 12 percent over the next five years, reaching 3.75 million units in 2014 from the current 1.89 million units in FY09, according to Ernst & Young. While exports are expected to contribute with volumes of 1 million units, the balance of 2.75 million units is from the domestic market.

The study identifies that economic growth with changing demographics and aspirational lifestyles are the main drivers for the growth in domestic market, supported by government support in the form of reduced excise duties, concessions on cleaner fuels and the ongoing improvement in highways,. The entry of the ultra low-cost cars is also expected to increase car penetration from the current levels of 9 per 1,000. The ultra-low cost segment should perform well given the appeal to a larger customer base. Exports are poised to grow significantly due to India's fuel-efficient low-cost product range.

Ernst & Young's analysis shows that overcapacities would increase and profitability may decline. "In this scenario, we expect global players with financial muscle to play on price and offer discount in the market. The manufacturers' brand equity is also expected to play a significant role in the purchasing decision by consumers. Indian industry is generally drifting towards scenario where in there will be large number of players selling similar products, as against a current oligopoly where we have fewer big players," says Rakesh Batra, Partner and National Industry Leader - Automotive Practice, Ernst & Young. "There is an upside risk on exports as it is dependent on the recovery of the global markets," he added.

Providing an overview of the industry in India and worldwide, the research has pegged capacity utilization in India at an average of 65 percent in FY09, close to the current global average of 64 percent. In India, considering the auto industry growth of 17 percent from FY03-08, one third of the total capacity (ie 0.83 mn) was added during FY05-08. However, there was no growth (0.13%) in the market during 2009, resulting in excess capacity. An unfavourable product mix also made matters worse as there is limited flexibility between models. "The long term growth drivers are in place" adds Batra "which is leading both international as well as domestic players to add to their capacities significantly". Both national and global players are expected to add to the capacities, forecast to increase from 2.89 million units currently to 5.42 million units in 2014.

According to the analysis, the current overall industry capacity utilization has been significantly lower, averaging to 65 percent in FY09 while the industry break-even level is estimated to be at about 75 percent per cent currently. In the current environment of shrinking demand and declining sales volumes, global auto makers are expected to consolidate their operations, resulting in a reduction in the number of sites, with production shifting to low-cost countries. Indian companies with unutilized capacities stand to benefit from this opportunity, says the analysis.