Race is on for luxury car sales

India Dispatch: Like other expensive car makers, Ferrari is wooing the subcontinent's growing band of high net individuals.

Amedeo Felisa, the chief executive of Ferrari, said all the company's cars would be made to order in Italy, adding 'we should have come [to India] a long time ago.' Prashanth Vishwanathan / Bloomberg Show more

Four years before the Italian luxury sports car maker Ferrari opened its first showroom in India, its executives went on a road trip around the country in two separate cars.

They travelled 11,000km across 16 states to test whether their 34.1 million rupee (Dh2.69m) car could survive Indian roads, where motorists frequently have to negotiate unruly traffic and wandering cows, road rage is common, and driving is often a roller-coaster ride of gaping potholes and high speed humps.

The cars - and the executives - survived the trip.

They called it an "adventure", while admitting the roads were far from perfect. Despite this, Ferrari, whose logo features the classic prancing horse, roared into the Indian market this year with a keen eye to tap a wealthy customer base.

With "exclusivity" as its key marketing strategy, Ferrari opened its first showroom in New Delhi in May and announced plans to open a second in Mumbai early next year. The company is hoping to woo India's high net individuals (HNIs) - a growing base of business tycoons, Bollywood and sports stars with assets exceeding US$1m (Dh3.6m).

India is home to more dollar millionaires and billionaires than any other country except the US and China. Indian HNIs increased this year to 130,000 from 84,000 in 2008.

The Swiss private banking group Julius Baer estimates this will rise to 403,000 in the next four years.

"Until now, we were in 57 countries. We are now in the 58th country, which is India," says Amedeo Felisa, the chief executive of Ferrari, adding that all cars would be made to order at Ferrari's plant in Maranello, northern Italy. "We should have come [to this market] a long time ago."

Ferrari, like many other global luxury car brands such as BMW, Maserati, Bugatti and Aston Martin - whose appearance in India until a decade ago was only in the movies - are pushing aggressively to tap this vastly under-penetrated market where barely eight people in every thousand own a car.

But such investments are a huge gamble at a time when car sales are slowing to a trickle because of increasing fuel prices, high interest rates that have been raised 11 times in the past 18 months to quell persistently high inflation, and looming fears of an economic slowdown.

In the fiscal year that ended on March 31, sales grew at a breakneck pace of 25 per cent to 2.5 million cars, buoyed by brisk economic expansion in the world's second-fastest growing car market after China, according to the Society of Indian Automobile Manufacturers, a lobby group based in New Delhi. At this rate, experts have predicted that by 2050, every sixth car in the world will be produced for the Indian market.

But car sales, viewed widely as a barometer of economic progress, are expected to grow at just 10 per cent this fiscal year. In June, sales rose by a meagre 1.6 per cent, the slowest pace in more than two years.

"The consumer sentiment is down right now, because of which the footfalls at the showroom are not being converted into purchases," says Vishnu Mathur, the director general of the society. He warns rising interest rates may have a "devastating" impact on sales this year.

But that is not slowing the march of global luxury, sports and compact car makers into the subcontinent. They are launching new plants and unveiling models tailor-made for the Indian market.

In July, Ford announced a $1 billion investment to build a car factory in the western state of Gujarat within the next three years - lured by the promise of hundreds of millions of first-time buyers in India who are expected to move up from two-wheelers.

The plant will be the US company's second production unit in India,taking its total investment in the country to $2bn. The development will provide a beachhead for the Detroit company's global ambition of doubling annual sales in the next four years to 8 million vehicles.

Joe Hinrichs, the chief executive of Ford in Asia Pacific and Africa, dismissed the slowdown as temporary. The company, he says, is betting on "dynamic regions of the world" - mainly Brazil, Russia, India and China - to offset the sluggish demand for cars in developed economies.

"We are aggressively expanding in markets around the world which have maximum growth potential," says Mr Hinrichs. "This is a bet on our future in India, but also a bet on the auto industry's future in India."

Other car makers are equally - and perhaps astonishingly - upbeat, despite falling sales.

Toyota, the world's biggest car maker, which operates in India through a joint venture with the country's Kirloskar Group, says that by 2013 it plans to invest $220m to nearly double its production capacity to 310,000 vehicles from the current 160,000.

India's largest car maker, Maruti Suzuki, reported a sharp slowdown in business in July. Sales plunged 25 per cent as the company grappled with recurring labour revolts, causing a $90m loss in output in June. Sales are also being hurt by rising costs of production and expensive car loans that are putting off middle-class consumers.

Maruti sold 75,300 vehicles in July, compared with more than 100,000in July last year.

But "long-term bullishness" remains intact, says Mayank Pareek, the executive director for marketing at the company. Buyers have tightened their purse strings, but he adds consumers are swamping its showrooms. This illustrates that the "intention to buy", or consumer confidence, among Indian consumers remains intact, encouraging optimism about sales over the long term.

The consumer research company Nielsen India said in July that inflation was taking a toll on household spending, but consumers remained the "most optimistic" globally about their jobs and the state of their personal finances.

The government has been equally keen to dismiss concerns of a slowdown in the car sector, which employs 10 million people. It has long been hailed as a major growth driver of the economy and accounts for 6 per cent of GDP and has an annual turnover of $73bn.

By 2016, that figure is expected to rise to $145bn, according to the car manufacturers' society.

"The high interest rates environment has affected the automobile industry, but there is no need to panic as there is a robust domestic demand," says Praful Patel,the heavy industries minister.