Indian Union budget 2011 cheers Automotive sector - National mission for EV, Hybrid vehicles

The Union Budget 2011 brought lots of cheer for automotive sector and for EV/Hybrid vehicles in general.

The industry that has hit by high input cost, interest rates and higher fuel cost in recent past was nervous anticipating an increase in excise duty from present 10%.  The industry has passed most of this cost to consumer and the last thing that it wanted is another hike that has to be passed on or get hit on margins.  Due to the painful inflation India is reeling through an increase in excise was expected.

The biggest relief the Auto sector got is NOT in hike in excise tax. All Auto sector stocks cheered to be back in green.  

The biggest reform that has been proposed is for a green transportation. The budget has proposed a National mission for EV and hybrid vehicles, that is expected to elaborate the investment and road maps. In Dec 2010, government had proposed incentive program for Electric vehicles.  

Below are some highlights of the union budget 2011

(Courtesy: Indian union budget website)

• Central Excise Duty to be maintained at standard rate of 10 per cent.
• National Mission for hybrid and electric vehicle to be launched
• Basic Custom Duty reduced for various items to encourage domestic value addition vis-à-vis imports, to remove duty inversion and anomalies and to provide a level playing field to the domestic industry.  (To be know yet what are the items that would benefit)
• Full exemption from basic Customs Duty and a concessional rate of Central
• Excise Duty extended to batteries imported by manufacturers of electrical vehicles.
• Concessional Excise Duty of 10 per cent to vehicles based on Fuel cell technology.
• Exemption granted from basic custom duty and special CVD to critical parts/assemblies needed for Hybrid vehicles.
• Reduction in Excise Duty on kits used for conversion of fossil fuel vehicles into Hybrid vehicles from 10% to 5%
• Excise Duty on LEDs reduced to 5 per cent and special CVD being fully exempted.
• Out right concession to factory-built ambulances from Excise Duty.

Indian Automotive Aftermarket - seeking new direction

Since last couple of months there are two major reports unveiled on Indian aftermarket. The first one was by CII (Confederation of Indian Industries) the government’s premier front ending agency for Indian industries and McKinsey& Company. The second one by ACMA (Automotive component manufacturer’s Association). The CII report lays out the opportunities that exist within the Aftermarket sector in India and its market size. The ACMA report is trying to indicate the loss for the auto component makers due to counterfeit parts and its effort to educate customers on its impact.

The Indian Automotive industry has come a long way to become a $146billion market in revenues by 2016.  Now India is 2^nd largest two wheeler market, 4^th largest CV market in the world and 3^rd largest PV market in Asia.  However the automotive aftermarket industry has a long way to catch up. I remember the days over 15 years back when people were worried to leave their vehicles at service centers because the feeling was that, once the vehicle enters the workshop it never runs properly. People were skeptic on their original parts being replaced by spurious parts while given for servicing that is sold for a price and fuel being stolen. It was as important to have a good personal relationship with a technician at authorized centre or a neighborhood independent garage as to have a family physician!

Market scenario

According ACMA the Indian Aftermarket is now at around $7.5billion of which aftermarket services accounts for $2billion and the rest in spare parts. However according to the estimate by ACMA, a whopping 1/3 of the component market is plagued with counterfeit parts. So through the excise and other taxes it is estimated that government is loosing about $50million in revenue.

But realistically the counterfeit part problem should correct substantially due to the fact the new vehicle population has increased significantly in last 5 years and the vintage vehicles would be replaced by new vehicles. Earlier due to poor road conditions and high maintenance frequency, the owners most likely opted for cheap alternatives. However now better infrastructure and better quality vehicles on roads; there would be a lot more importance given to genuine parts. The counterfeit issue also is mainly geographical and seems more at semi-urban, rural places where the awareness is less and objective is to spend very less or nothing to maintain the vehicle. ACMA has announced very stringent measures to overcome the issue by developing programs to educate customers, and even planning to conduct raids on outlets promoting the grey market.

Over the years the aftermarket scenario has not changed much in terms dealing with dealers, transparency, expensive spares, lack of customer service mindset except that the market has grown tremendously.  The market is still highly fragmented and long way to move towards getting organized. The service sector is mainly divided between OEM dealers, Authorized service centers, multi-brand service centers, independent garages and road side mechanics. 

The aftermarket is the most significant phase to determine customer loyalty towards a brand. There are incidents where it is proved detrimental to OEMs due to poor aftermarket support. The global giant Fiat, in spite of fielding better cars like Uno and Palio faced the ire of customers for poor spare parts supply and service network clubbed with internal issues like labor during 1997-2004. Its operations in India were almost halted. Issues like high cost and waiting time to acquire the spare parts affected the sales of Ford’s Fiesta, which is a very competent model but lost out to its peers due to poor aftermarket reputation. Ford in India went through tough times in sales in spite of being in India over a decade now, until its launch of Figo. No one can deny the fact that for Maruti Suzuki to have a leadership positions since its existence is its vast service network across India and economical generic spare parts.

In spite of high growth across all segment and brands in industry, Fiat’s recent sales have stagnated or even on downwardly trend. After loosing its dealership network, Fiat was looking for a fresh entry in India market and joined hands with TATA motors. A JV was formed wherein Fiat will provide the engines to TATA cars and TATA will sell/service Fiat cars. In spite of good cars and having good business through it’s engines, the JV is a loss making entity. Fiat has not gained its foot hold, this despite of TATA being 3^rd largest car seller. The dealers form an integral part of OEM’s success and being a FIAT car owner, the primary factor I attribute for Fiat’s issues is its bad marriage with TATA for sales/service. TATA has pathetic reputation of having a CAB culture in its dealer service. TATA’s Indica is the highest selling car that is popularly used in CAB services and its customer service can not handle customer of different segment. My 1.5 years of interface with TATA for a lovely Fiat car has been nothing but frustration, agony and feeling of getting robbed every time I visited their dealer. Fiat has announced recently that it would test its own showrooms as a branding effort but sell the cars through TATA dealers. But this is unlikely to change the scenario since the issue is not for the brand image of Fiat but the sales and support.

I ran a small survey covering 50 individuals (Car owners) through common poll and individual feedbacks to know their preference after the warranty period is over.  The results are pretty much mixed with 60% of respondents sticking to their dealer center and 40% of them deciding to leave them for an independent service provider.

It was not a comprehensive survey as I would have loved to run to analyze it more comprehensively to reason their choice. However the individual comments and feedbacks indicate the reasons.

Few factors that decide for individuals who want to continue at dealer are;

• Increase in technology and electronics involved in modern vehicles make it not possible to move to independent service providers
• Most of the people who decided to stick with dealers own foreign brands like Toyota, Honda. This clearly indicates that it is perceived that local service providers are not competent enough and do not have enough infrastructure
• It is very important to gauge the experience during warranty period to decide to continue at the dealer centers

Majority of respondents who want to go to independent service providers are the owners of vehicles from Indian OEMs.

The challenges and trends

India now has presence of almost all automotive OEMs across all segments and the space is getting narrower between the segments. So the OEM equation is changing rapidly now to gain customer loyalty. OEMs are lining up all sorts of attractive offers like extended warranties, extended free service periods, decreasing the service frequency with new generation oils etc towards minimum cost of ownership. This has not gone down too well with dealer community. With increase in land/wages cost, dealers don’t like to this fact since the warranty replacements don’t fetch them enough margins to sustain according to a works manager at a dealer. The manager forced me literally to pay for a warranty part on my car until I put my foot down firmly and refused pay saying to take it OEM. Finally he opened up with issues dealers are having by replacing the warranty parts. They are under lots of pressure from OEMs with loads of vehicles, increased work hours, with minimum salaries, and can not earn through sales of spares. Incidentally TATA cars recently lost two large dealers with over 10 years of relationship to a German OEM indicates the Indian OEM’s need for re-strategy. 

The aftermarket is facing the same challenge as the whole Indian economy is reeling through; too much growth in too little time leading to insufficient skill sets, no proper processes, customer comes last in the rat race, no priority for customer support/satisfaction since the market is so big and there is no time to improve.

The land prices have increased significantly in India in recent past and complexity of new generation vehicles that need high capital investment in necessary equipments, technology and right set of bays for better payback period. It also can be seen that workforce including customer service are uneducated, unskilled and dealers don’t want to invest in skilled people or training them with a fear of loosing the staff. The skilled people are poached by dealers with foreign brands.

Multi-brand servicing a new trend:

There is clearly a large opportunities exists between branded dealers/ authorized service centers and local garages. This has lead to aftermarket getting more organized with independent service hubs taking retail chain models that serve multi-branded vehicles and offer branded spare parts priced between OEM parts and grey market.

Many big names have entered in to this segment and hopefully these can bridge the gap between the arrogance of dealer centers and hesitance to visit local garages due to spurious spare parts.

Here are some prominent ones present in India now;

Mahindra FirstChoice –  This started as a used car division of Mahindra with certified used car sales and independent car evaluation services. Started in its first multi-brand servicing centre in 2008 under the brand Carxspace  and has presently 9 workshops.

The centre claims full attention to its customers with minimum services handled in a day and claims offer a warranty for next 4000km for any repairs. Night only services sounds interesting concept and it also offers an alternate car to drive when the car is at service.

Mahindra itself is not very popular among mahindra vehicles owners, and is tough to this group to win the trust of independent customers. Advantage is that this is backed by strong Mahindra group and if does reasonably good then has good potential to capture the market.

Carnation –Started by Mr Jagadish Kattar, the person who led Maruti Udyog Limited from 1999 to 2007 started Carnation with a vision to setup a transparent service setup. Probably it needed an industry insider who understands the issues the OEMs face to gain the loyalty with fair aftermarket services.

Carnation seems to be doing all right moves to gain the customer confidence to at least try them. Good marketing (I rate them one of the best online presence), new services like Workshop on Wheel, a mobile service facility that could be a quite handy for corporate or housing societies.  They have tied up with the European aftermarket giant Magneti Marreli for premium cars and also has tied up with the popular India Industrial design house DC design (of  Mr Dilip Chabria) for customized car solutions.

Presently Carnation has 22 centers and operates in both ownership and franchise models. A good control would be needed to hold the vision with franchise model. However there may not be much alternative to capture the market going by its own exclusive hubs that could prove too expensive to expand.

Bosch – Bosch Car Services (BCS), the globally successful model of has been one of the most successful and early movers in this segment. It has around 450 stations operated through franchise model. Bosch in India is an OEM parts and equipment maker has a good integrated model for a better margins.

Castrol – A lubricant major has a line of service centers called PitStop. Its more like a quick check of pre-defined points, or a quick oil changing setup like many popular US chains. However it has given its name to many roadside mechanic shops that use their lubricants. I tried to visit some from the address given by them and could not even distinguish them like an organized center.

With India heading to become 5^th largest automotive nation, the highly fragmented market leaves a lot of space for the new entrants and consolidation. There is large scope to adopt technologies to seamlessly integrate customers within the aftermarket systems for more transparent experience, quick turn around, and preventive maintenance. 

Incentive for EV makers - Will really charge the India EV market?

The New and Renewable Ministry, of Indian Govt announced an incentive scheme for EV manufacturers in India amounting to INR4000, 5000 and 100,000 for low speed 2 wheeler, high speed 2 wheeler and EV car respectively. This could amount to 20-25% of prevailing ex-factory prices. The incentive comes with a tag of filling 30% of supply chain through locally developed parts. 

SMEV (Society for Manufacturers of Electrical Vehicle) a consortium of EV, technology and aggregators announced, through the incentive they receive the EV makers might plan to pass on this further to the buyer that could fuel the sales of EV market in India.

However the optimism of officials at SMEV that this move could even double sales of EV in next year seems far fetched considering the ground realities in India that could support this growth.

The incentive program in itself may not serve much purpose without a proper roadmap since India does not have any policy framework related to EV growth yet. The incentive program itself is a halfhearted attempt that came so late compared to its global peers and

here are some fallacies why the Electrical Vehicles may not gain momentum in India.

1. A major benefit of EV is to Reduce dependency on Petroleum products – However India is fast becoming dumping ground for all OEMs in the world for the ICE based vehicles with companies churning their capacities like there is no Tomorrow.  According to some statistics, around 100,000 electric vehicles exist in India, majority of them are two wheelers compared to car maker Maruti suzuki selling over 100,000 car per month. Emission taxes are predominantly imposed in Western countries now to curb the driving of cars where as in India the Petrol and Diesel are subsidized. The recent outburst from Environment Minister Jairam Ramesh to ban SUVs that are heavy on fuel consumption or asking them to sell the Diesel at un-subsidized price is the first vocal protest heard on this issue.

2. Need for Power - The basic challenge for India to promote EVs at this point is not the infrastructure or demand but the availability of Power itself. According to Expert committee at planning commission, for its target of 8-10% GDP growth until 2030 to eradicate poverty, Indian power growth has to be at least 6% on annual basis. So the primary focus for India now is to meet its power requirement. Govt of India setup this expert committee to draft a comprehensive energy policy to meet the challenge through Planning commission that sets plans for India covering 5 years span (presently India is in 11^th five year plan). All the energy demand recorded in the policy are for the Industrial, house hold, agriculture, rural electrification etc., and not for transportation need like charging EVs.

3. Another basic benefit of EV is for the Green cause to control emission – This makes it even trickier for India since around 70% of Power is generated using thermal power plant where coal is the primary source of energy. Since India has large Coal reserves, coal would continue to be the primary source till 2031-32 according to the energy report. So it may not make much sense to promote EVs on greener cause where they are charged by electricity that is generated by burning coal. Govt is putting enough thrust on investing in technology to reduce the carbonization due to burning coal.

There are some incentives offered by the Govt. like for 2 wheelers there is no registration required from the road transport authority, there by avoiding road tax. But from common person’s perspective EV is not fully ready to lure the customers due to its own challenges of cost/reliability and infrastructure like anywhere else in the world.

The present EV market scenario in India where there are around 15 players in 2 wheeler segment, however most of the parts sourced from the Chinese imports and assembled and sold in India. There are some isolated battery operated 3 wheelers (Auto rickshaws) which use Liquid batteries that are under the radar from environmentalists. The erstwhile Reva is now a Mahindra group company. But Reva was never a successful EV company with around 600 cars sold last year, about 300 in India despite of its 10 years of existence. But its capital is the IP that Mahindra would be interested to use for its small LCVs (sub ton category) mainly for export market. GM India had partnered with Reva for technology collaboration for Chevy Spark, but since the Mahindra took the control of Reva, the relationship ended. The Auto Major TATA has good amount of thrust on EVs with some of its models like Indica EV is scheduled to hit UK/Scandinavian market by 2011.

So the EVs to gain grounds on Indian Road seems quite far, may be as far as 2030, however one trend could be seen in near term is that, with some localized promotion by private industries/institutes who are investing in RE sources could use the vehicles for their organizational use within their premises. Even local Municipalities could take initiatives to tie up with private players to own some fleet..

Indian Commercial Vehicle Market Outlook

After the small car assault on Indian roads now the global commercial vehicle makers are lining up to share the CV market segment that is growing at around 20% Year on Year except for 2008-009. Recent past market movements and consolidations are also getting cleared to determine the way Indian CV market is going to be shaping up.

Indian automotive industry, especially the CV segment has come a long way since 1950’s to become the 4th largest market in the world now with over 400,000 unit sales. The growth potential of Indian market is well accepted to attract investment from the global majors not just in installed capacities but in local R&D, New product design/development initiatives for Indian as well as export markets.

Market Scenario

Till pre-1980s while the Indian market was a closed market with poor Indian roads, infrastructure and demand for low cost vehicles witnessed sluggish pace in the styling, engineering in engine, drives of the vehicles. Poor road conditions contributed to the increased cost of ownership due to heavy maintenance. There was less scope for innovation hence the growth in variants of the vehicles was severely restricted.

The year 1991 saw the opening up of Indian markets for foreign investment and focussed investment in infrastructure development. The collaboration with global auto makers in terms of investments and technology started taking place. TATA had a collaboration with Daimler AG dating back to 1954 to assemble and sell the Mercedes Benz range of LCV in India. Until February 2010 Daimler AG had 5.4% stake in TATA motors that it decided to offload to pursue its own interest in India.

The development of Golden Quadrilateral Highway program that stretches across the India and revamped existing national highways in to multi and one-way lanes probably is one of the defining phases of Indian road transport and made headway for the CV industry. Presently India has over 57,000 km of National highway including stretches of express ways. A distance of around 400 km once took over 15 hrs was now possible to cover at half the time depending upon what time of the day the travel is made.

With better highway infrastructure providing better bearing capacity is leading to an increased demand for Multi Axle Vehicles. MAVs also offer better cost per tonne by reducing number of trips, fuel consumption and congestion. The same time Indian retail and logistics industries were fast turning in to organized sectors. The logistics model turned in to HUB and spoke model for distribution thereby giving a big boost for the LCV segment further to take the inroads. Government and local city corporations are working on policies further to restrict LCV within city limits that would trigger a demand of sub ton segment.

In passenger vehicle segment, the market is made up of small tourist operators for long distance travels usually over night and state run transport corporations. However the state transport corporations are loss making with inefficient operations, using old fleet of buses that breakdown more than they run and consume a lot of fuel. This gave rise to a new market for private operators that entered with new fleet and better operations. The light passenger vehicles are gaining market share by running on secondary roads, state highways connecting smaller cities. In urban market the school, office shuttles, ambulances etc., create a great prospect in next 5 years.

With rapid population growth in metros, the local municipal corporations have started looking in to rapid transit systems. The Volvo, Mercedes buses got great reception for long distance travel with large deals from not only the private travel companies like Raj travels but also the state road transport companies.

Further to this Indian Government came up with Automotive mission plan (from 2006 to 2016) to promote and grow the Automotive sector with a mission of making Auto Sector to contribute 10% to the Indian GDP this is around 6% presently, that would translate the turnover of over $150 billion and having created jobs to over 25 million people by 2016 in Auto eco-system. To aid to this Government has invested for world class infrastructure for localised R&D, testing, certification and validations at; Manesar, Chennai, ARAI (automotive research association of India) and VRDE (vehicle research and development establishment) at Ahmednagar. World class testing track at Pithampur


Market segment
In 2009 CV market saw sales of 384,000 units of which 45% were LCV. The export segment saw over 42,000 units mainly to Middle East and African countries.

Vehicle type	%
M&HCV	39%
LCV	45%
M&HC passenger vehicles	9%
LC Passenger vehicle	7%

The Commercial vehicles are classified based on Gross Vehicle weight which the weight of the vehicle and the maximum weight the vehicle are allowed to carry. GVW of over 16 tonnes the vehicles are classified as HCV, 7.5 to 16 tonnes as MCV and less that 7.5 tonnes are LCV.


Market players

The Indian majors control majority of the market share with TATA motors enjoying major share of that in both cargo and passenger vehicle with a share of 64%. TATA, Ashok Leyland and Mahindra & Mahindra together control over 84% share. Over last 5 years, the CV market has seen global majors entering India eyeing to taste this huge potential. A lot of consolidations, JVs have taken place to position them in India, ASEAN market.

TATA motors	Daimler AG had 5.4% stake in TATA TATA assembled and sold Mercedes Benz models for about 15 years since 1954 Daimler AG sold its stake to TATA sons and CITI Group to pursue its own interest in India Bought Daewoo Commercial Vehicles Korea in 2004 JV with Afzal Motors Pakistan to produce CV TATA buys 21% stake in Hispano Carraro SA the Spanish bus maker and takes remaining 79% in 2009 TATA signs JV with Marco Polo Brazil to build bus for rapid transit systems. TATA holds 51% and MarcoPolo 49% TATA signs JV with Thonburi Motors of Thailand with 70%-30% stakes respectively.
Ashok Leyland Nissan	Ashok Leyland the 2nd largest CV maker formed JV with Nissan 2010 for LCV for Indian and export. It also formed another two JVs for Powertrain for LCV and technology development.
Mahindra & Mahindra Navistar Inc.,	Mahindra is market leader in Utility vehicles India and export markets In 2007 Joined hands with Navistar Inc JV wih Navistar Inc to produce Diesel Engine for the CVs
Eicher Motors AB Volvo	AB Volvo formed JV with Eicher motors the LCV major in India. The JV is called VE commercial vehicles Ltd.,  Volvo controls 45.6% and the balance by Eicher.
Swaraz Mazda	A JV formed between Swaraj, Mazda Japan, Punjab tractors and Sumitomo to Launch LCV Presently Sumitomo owns 53.5% stake.
Force Motors MAN AG	Force motors a leading CV marker of India and MAN AG have a 50:50 JV based at Pithampur India
Daimler AG	Had in talks with Hero Group, the market leader in 2 wheeler but dissolved it in 2009 with both organizations trying to focus on their key markets. Daimler is planning to launch its first fleet by 2011 from Chennai where the plant is being built and a test track is set up
AB Scania	Had an agreement with L&T, the industrial conglomerate for sales in India. But Scania a conservative yet firm in its plans is making a feasibility study to start manufacturing in India and might look for a JV to leverage dealer network
Iveco SPA (CV unit of Fiat)	Had relationship with Ashok Leyland but Ashok Leyland bought back the 30% and with TATA having agreement with FIAT, the relationship might have an extra weight
Paccar Inc	The US based truck maker is keen to enter India with planning to have office in Pune, India

Opportunities:
1) Global markets getting stagnant, while China, India and Thiland driving double digit growth
2) Indian GDP targeted at 8-9.5% growth in coming years leading to the need for massive infrastructure movement
3) India does not have a clearly defined scrap policy for old vehicles. So far the small operators have been pushing the old vehicles on road to maintain their bottom-line. However this fleet needs to be replaced with better technology vehicles with better load capacity and less maintenance
4) India Retail, logistic, distribution sectors getting organized creating opportunity for CV market to split in to further more segments

5) Easy financial options. Most of the vehicle makers now have a strategic relationship with bankers and also their own financial units for easy credit.

6) More specialized vehicles required for perishable, oil, mining sectors

Challenges

1) Excise, interest rate, fuel price, raw material price hikes

2) Trained drivers for sophisticated vehicles and planned maintenance

3) Increased competition and expansion in capacity would pressure on margins leading to just a volume driven model

The commercial vehicle market is purely an economic pay and has moved cyclically, however India now established itself as a global manufacturing hub for sourcing and now proving a high growth market also makes it surely a long term story for CV makers.

Picture courtesy - TATA, Mahindra navistar, swaraz mazda, Volvo india.