India’s car manufacturing industry in the fast lane

India has its sights set on becoming a vehicle manufacturing hub, but it faces some obstacles. Executives are calling for infrastructure improvements and regulation reforms to support the sector.

Employees work on the final assembly of cars at the Ford facility in Chennai. Ford India’s exports almost doubled to 76,981 vehicles in 2014. Prashanth Vishwanathan / Bloomberg News
Powered by automated translation

Ford is churning out thousands of cars every month at a vast manufacturing plant on the outskirts of Chennai. The US car maker this year plans to start production at a new US$1 billion plant in Sanand in the state of Gujarat to ramp up production in India.

It is ploughing ahead with its investment despite the various challenges India’s car sector is facing, including depressed sales and deficient infrastructure. Volkswagen and Mercedes-Benz are also among those investing in expanding their manufacturing operations in the country.

The government is hoping to encourage even more investment into the car manufacturing industry, and it has ambitious plans for India to boost its position as a global hub for car makers. The sector is at the centre of its Make in India campaign, which aims to grow the country’s manufacturing capabilities and attract more foreign investment.

The country hopes to “emerge as the world’s destination of choice for design and manufacture of automobiles and auto components, with output reaching a level of $145bn, accounting for more than 10 per cent of the GDP and providing additional employment to 25 million people by 2016”, according to the Make in India website. The sector accounts for close to 7 per cent of the economy and employs about 19 million people directly and indirectly.

India is the seventh-largest producer of automobiles in the world, with an annual production of 17.5 million vehicles – made up of cars, motorcycles, and commercial vehicles – of which 2.3 million are exported, it adds.

“The Indian automobile market is estimated to become the third-largest in the world by 2016 and will account for more than 5 per cent of global vehicle sales,” according to the website.

Ford India’s exports almost doubled to 76,981 vehicles last year, according to data from the company. It says that this “solidifies India’s position as an export hub”. It exports engines and cars to countries including the UAE, Bahrain, Iraq, Kenya, South Africa and Mexico. But sales within India were disappointing last year, declining to 77,140 vehicles compared to 80,431 the previous year. That reflected a general trend of weak demand in the local market.

Last year was “a challenging year for the Indian automotive industry”, says Anurag Mehrotra, the executive director of marketing, sales and service at Ford India.

“Factors such as high interest rates and inflation impacted the much-needed turnaround in sales and consumer sentiment,” he says. “The government’s recent decision to discontinue excise duty concessions will only add to the woes of the automotive industry, with customers postponing purchases. We hope that the government will introduce some pro-consumer policies in its upcoming budget to help improve market sentiment and boost demand.”

Ford’s new plant is set to double its annual manufacturing capacity in India to 610,000 engines and 440,000 vehicles.

Abdul Majeed, a partner and the national automotive leader at PwC India, says that manufacturers – whether multinational or Indian companies – build predominantly for the domestic market rather than for export.

“A few have declared their Indian locations as global manufacturing hubs – for example, Hyundai and Nissan,” he says.

He adds that the government’s plan would help car makers “look at the export market very aggressively”.

But there are hurdles that need to be overcome.

“Foreign car makers in India look at two things,” he explains. “What sort of opportunity they have in the domestic market and then what sort of avenues they have to use their production base in India for exports. When they are convinced of both, then they will move forwards. We are not very cost-competitive compared to China and our domestic market is not growing well. That is why companies have been waiting and watching. Now, with the new government coming in, things should move in the right direction.”

A number of steps need to be taken at a policy level to create a more favourable environment for manufacturing, he explains.

“The biggest challenge is that it not very cost-effective because we have a lot of infrastructure problems,” says Mr Majeed. “India’s tax system is regressive, which is why the government is talking about bringing the GST [goods and services tax]. Until you do tax reforms, labour law reforms and infrastructure improvements, it’s very difficult to realise the dream of becoming a global hub for the automobile industry.”

With inflation and interest rates easing and signs of the economy picking up, these are positive factors for the domestic industry, he adds.

Mercedes-Benz has a production facility covering 100 acres in Chakan, near Pune, that it set up in 2009. It describes its expansion plans as part of a strategy to be “future-ready”.

The car maker is investing to expand capacity at the Chakan plant, bringing its total investment to more than 10 billion rupees (Dh595.4 million). Once this expansion is completed, the plant will have the capacity to produce 20,000 vehicles a year.

“The extended facility has secured the necessary clearances and will begin production by June of 2015,” Mercedes-Benz India said.

Volkswagen’s India division on Tuesday launched a diesel engine assembly plant at its facility in Chakan. This is its first engine plant in the country.

Viraj Kalyani, the executive director of Kalyani Forge, a forgings company in Pune that has global automotive firms among its customers, believes that India has “tremendous potential” to grow as a manufacturing hub if it makes some changes.

“The main thrust should come from simplifying government regulations,” he says. “Cut the paperwork, variety of taxes, permissions, licenses and departments that the industry has to deal with. These add no value to the public and increase our fiscal deficit. We need the tax and labour reforms kicking in much faster than planned. Also, it’s a little strange how we have taken power cuts as a fact of life all over the country. After 60-odd years of independence, we should be expecting much better service for utilities.”

There are other issues that also need to addressed in India’s approach to developing its role in the sector globally, he adds.

“India plays a major role in the global automotive industry now,” Mr Kalyani says. “Many of the Indian automotive suppliers are global in scale and reach. Structurally, there are signs of the auto market entering a new phase of maturing. However, we need to get better at making vehicles and not become a contract manufacturing hub like China.

“We have shown the world how to make small cars, for example, but we should look at how to upgrade those small cars and boost their performance.”

Follow The National's Business section on Twitter