How Automakers Can Conquer This Fast-Growing Market


It was interesting to note how small cars stole the show last month. While checking out U.S. auto sales data, my attention unconsciously leaped miles away to a nation that's known as the place for compact cars -- India.

A huge market in itself, India is attracting automakers from all across the globe. So how far have auto majors managed to make their presence felt in this emerging market? What are their latest plans? I thought of digging a little deeper to get the answers.

Growing bigger
Compact and affordable cars account for a whopping 70% of the total cars sold in India. Less road space and a higher number of middle-class families are key driving factors. India is currently the sixth biggest car market in the world and, according to a McKinsey report, it could climb up to third place by the end of the decade. The Society of Indian Automobile Manufacturers has predicted a double-digit increase in passenger car sales in India this year. It won't be wrong to expect most of that growth coming from the small-car segment.

With India's central bank resorting to rate cuts after a while, and other banks following up with a reduction in auto lending rates, car sales look set to shoot up further in the near future. Here's a look at some of the automakers vying with each other to grab a piece of the pie...

The behemoths fighting
General Motors
(NYS: GM) has definitely made it big in the country. Its sales in India were up around 13% last month, driven primarily by its hatchback unit, the Chevrolet Beat. GM is now working hard to get a double-digit share of the Indian market (it accounted for roughly 6% of total passenger car sales in 2011). Some of its latest plans include:

  • Investing $500 million by the end of this year, doubling capacity at two of its factories.

  • Intensifying focus on small cars. The company is set to roll out Sail, its fourth small car in the nation, in the latter half of this year.

  • Aggressively expanding its sales and services network in the country.

While GM seems to be doing a good job in India, Ford (NYS: F) still has some work to do. Ford didn't really take India's small-car market seriously, and paid for it in a big way. For instance, Hyundai, which entered India a year after Ford did, has already become the second largest player in the country, largely because of its push for small cars. Thankfully, Ford seems to have realized its mistake before it's too late, and now has some plans in place for the next few years, some of which include:

  • Making India its small-car manufacturing hub to cater to much of the Asia-Pacific and Africa region. Ford expects these regions to account for nearly 60%-70% of sales growth by mid-decade.

  • Launching several new models, doubling capacity and adding newer destinations (as many as 18 this year) for export of small cars from the country.

  • Ford's new $1 billion plant in northwest India will become operational in 2014 and will focus mainly on small cars.

Others in the race
In a bid to grab a bigger chunk of the Indian small-car market, HondaMotor (NYS: HMC) launched its second compact car Brio late last year. Within months, the Brio has emerged as a winner for the company, accounting for a whopping 58% of total units sold in March.

Last month, Honda also increased its stake in its Indian subsidiary Honda Siel Cars, as it aims to expand capacity. The company doesn't see much of an opportunity for large vehicles in India, and is now focusing on small cars instead. It believes that India could soon become its third biggest market, overtaking China. Honda now wants to make India the hub for its diesel engines meant for small cars.

As is evident by now, automakers see India as an excellent low-cost manufacturing and exporting hub. Like Ford, Toyota (NYS: TM) has also jumped onto the "export from India" bandwagon. It has started exporting its made-in-India compact Etios Liva hatchback (launched last year) to countries such as South Africa. The company's March sales were up an astounding 87%, with Liva recording its highest- ever monthly sales during the period. Toyota is busy increasing capacity in the nation this year.

The Foolish bottom line
The going definitely won't be easy for these foreign players. Local player Tata Motors (NYS: TTM) has a big hold in the market and is the third largest automaker, after Maruti Suzuki and Hyundai. Tata's small car Indica reported a 65% surge in sales last month; while sales of the world's cheapest car, Tata Nano climbed 20%. Nevertheless, India remains a huge and relatively untapped market -- the reason we see so many major automakers making the country a priority.

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At the time thisarticle was published Neha Chamaria does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of General Motors and Ford Motor. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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