Auto sector: Emerging trends and challenges

AUTO GIANT: Kapil Arora, Partner - Automotive Services, Ernst & Young.

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Globally, the automotive sector is in transition in many markets. While it is growing significantly overall, major differences in market dynamics exist by geography. The US market is experiencing poor profitability, industry consolidation, restructuring and spin-offs.

Market share dominance is shifting from the traditional Big 3 US OEMs to other Asian-based manufacturers and suppliers. The emerging markets, particularly India, China and Russia have seen frenzied activity over the last few years.

India is the second largest two wheeler market, fourth largest passenger vehicle market and the largest three wheeler market in the world. By industry estimates, it is expected to contribute approximately 10 per cent to India’s GDP by 2016.

In the immediate future, the market likely to witness intense competition with leading global OEMs as well as Indian vehicle and component manufacturers aggressively showcasing their product portfolios and hoping to translate the much hyped potential of the Indian marketplace into higher market share, revenues and profitability.

Driving this phenomenon is the continued growth of the Indian economy, reflected in increased consumer spending and growing disposable incomes of a vibrant and an aspirational middle class.

Of all the segments in the Indian auto space, the passenger vehicle segment will probably witness the most intense market action with introduction of nearly two dozen new models and variants. The entry level segment will be redefined owing to the introduction of a car priced under $ 3,000 in early 2008. Several first-time buyers will graduate from the two wheeler market to this base segment.

While the number of vehicles will grow rapidly, the related road infrastructure will face added pressure to sustain the increased vehicular movement, particularly in the major metros.

All market participants will have to quickly rethink and alter their own pricing strategies and product portfolios to combat the challenge. Notwithstanding the competition, several players have announced plans to enter this segment and are forging new joint ventures and alliances. While it is difficult to track consumer habits in a rapidly evolving market, price competitiveness will certainly remain a critical success factor.

The mass market consumers are likely to make product selections based on the price competitiveness, fuel efficiency and liberal credit availability. Valued added features, more lucrative sales incentives to dealers, extended warranty coverage will emerge as some of the means to retain and increase market share in this extremely price sensitive market segment.

Key expectations of the automotive sector from the forthcoming budget include policy support through adoption of a uniform excise structure for passenger vehicles, providing tax benefits for development of alternative fuels and powertrain technologies and extending liberal credit to the agricultural sector for purchase of tractors.