© Reuters. FILE PHOTO: Vehicles are pictured at a toll booth in Mumbai, India, August 13, 2019. REUTERS / Francis Mascarenhas
By Aditi Shaha
NEW DELHI (Reuters) – Foreign automakers' hopes of a booming Indian auto market are rapidly fading as a brutal second wave of COVID-19 infections and government limited scope for further stimulus spending suggest a rebound far behind China and the US United States could lag behind.
Automakers, who wiped out nearly a decade of Indian sales growth in 2020, expect demand to recover this year. But it's likely led by small, affordable cars – a sector dominated by domestic market leader Maruti Suzuki and rival Hyundai – rather than the premium models produced by most overseas manufacturers, industry leaders and analysts say.
With their Indian factories running well below capacity and sales falling far short of original hopes, companies like Ford, Honda, Nissan (OTC :), Skoda and Volkswagen (DE 🙂 are faced with difficult decisions about future investments.
"It's a survival problem," said a senior executive at a Western automaker who refused to be named.
"The decision to stay in India depends on a cost-benefit analysis of other international markets," added the executive, predicting that the number of automakers in the country could decline if the outlook remains bleak.
In India, General Motors (NYSE 🙂 and Harley-Davidson (NYSE 🙂 closed their stores last year.
Anurag Mehrotra, managing director of Ford India, told Reuters the auto market had not grown as expected and COVID had made matters worse, hurting domestic sales and exports.
"The uncertainty in the long-term growth prospects for the auto industry and economy has created serious challenges, including capacity utilization," said Mehrotra.
He said the pandemic will require "agile solutions and tough decisions," but did not provide details of Ford's plans. The US automaker has already announced that it is working on a new plan for India.
Volkswagen, which revamped its India strategy in 2018 and acquired its sister company Skoda, reiterated its plan to invest $ 1.2 billion by 2025 to reach 5% of the market with new launches, starting with two SUVs this year.
The aim is to further expand and strengthen the group's position in the Indian market, said a spokesman for the local Skoda Auto Volkswagen India unit.
Honda and Nissan did not respond to emails asking for comments.
A decade ago, India was widely dubbed the world's third largest auto market in 2020, trailing only the United States and industry leader China as per capita car ownership among its 1.3 billion people has caught up with more mature markets.
Instead, years of high taxes on large cars and SUVs, which have disproportionately affected foreign automakers, an economic slowdown in 2019 and the pandemic held them back in fifth place.
According to Ravi Bhatia of consulting firm JATO Dynamics, the purchasing power of Indian consumers is well below that of the West, with the weighted average price of a car being just $ 10,000 compared to $ 38,000 in the United States.
The long-term potential remains, analysts say, with only around 27 cars per 1,000 people in India.
Advisor LMC Automotive expects auto sales in India to grow 35% this year to 3.17 million, from nearly a decade low of 2.35 million in 2020.
But that would still be a fraction of the top markets. LMC expects sales in China this year to grow 7% to 22 million vehicles and in the US by 21% to 13.5 million.
While both China and the United States are leaving the pandemic behind, India is still recovering from a deadly second wave and has only fully vaccinated about 5% of adults.
The additional pressure on public finances has also caused India to lose its creditworthiness for investment, limiting its scope for additional stimulus measures that have helped boost US and Chinese auto markets.
For overseas manufacturers, this is a dire prospect at a time when they need to invest in electric vehicles and future technologies in more mature, more profitable markets.
According to the Society of Indian Automobile Manufacturers (SIAM), Ford, Honda, Skoda and Volkswagen saw sales declines of 20 to 28% in the past fiscal year through March 31, more than double the decline at Maruti Suzuki and Hyundai.
In the factories of some foreign manufacturers, capacity utilization has fallen below 30%, data from SIAM showed.
That is far from their original goals.
Nissan had hoped for 5% of the Indian auto market by 2020 but has less than 1% today.
Honda told Reuters in 2018 that it takes 10% market share to be a "meaningful player". Its share has fallen from 5% at the time to 3%, and it has closed one of two plants in the country.
And Ford, which has invested over $ 2 billion in India, has less than a 2% stake.
To be competitive in India, companies need a steady stream of new products that require more investment, said Ammar Master of LMC.
"Automakers with an aged product line are facing an uphill battle and at greater risk of losing sales and market share," he said, adding that companies like Ford, Nissan and Honda do not currently have strong product pipelines.
A lack of clarity about export policies and other regulatory hurdles are making things difficult for global automakers, executives from two of them said.
India withdrew its export incentive program last year – crucial for companies like Ford and Volkswagen that ship more cars than they sell locally – and has yet to complete a new one.
The lack of free trade agreements between India and exporting nations also puts it at a cost disadvantage compared to countries like Thailand and Vietnam that have such agreements, the executives added.
"India needs to offset the associated risks that prevent multinational automakers from growing or investing," said Vinay Piparsania, former managing director of Ford India.