Automotive Sector

India’s automotive industry is booming. Expectations are rising. But can it become a significant player in the global automotive industry?

The industry currently contributes about U.S. $34 billion to the Indian economy, equivalent to five percent of GDP. It produces over 11 million vehicles a year. Directly and indirectly it employs more than three million people.

Burgeoning home market

Growing mainly off burgeoning domestic demand, the industry has been expanding at around 16 percent annually over the past five years.

Through a study done by international consultants, Some believe the Indian automotive industry could emulate the Indian IT sector, which has emerged as a leading supplier of low-cost, high-quality IT services to the world. Is this realistic, given that India has to compete with fast-developing auto industries in China, Brazil and Eastern Europe?

The Indian automotive executives are optimistic it can. They expect domestic growth to continue, fueled by rising disposable incomes and increasing consumerism. They also believe that global automakers will continue to allocate an increasing proportion of their foreign direct investment into India, initially into manufacturing and then later into auto engineering and R&D.

And why not?

India is a billion-citizen economy where vehicle usage and ownership are still very low by world standards. The Indian automotive market is now one of the fastest-growing in the world.

However, companies recognize that their labor cost advantage is eroding as both shop floor and management wage costs rise. They plan to offset these labor cost increases through automation and improved management efficiency. Whether this can be achieved remains to be seen.
Good reasons for caution, but there are good reasons for caution.

India’s ramshackle infrastructure is retarding the industry, particularly its ability to increase physical exports. The auto industry also lags sectors such as IT and financial services in management training, reward and retention.

India’s fragmented component industry needs more consolidation if it is to achieve critical mass. Distribution and marketing remain relatively rudimentary.

Internationally, Indian automakers and component manufacturers accept that they need more alliances in distribution and marketing. They need to make more well-chosen acquisitions, especially in the components sector.

Critically, they acknowledge that to attain truly global scale the industry must build persuasive global brands.

Private equity investments are considered to be one of the most significant methods by which entrepreneurs obtain finance. Private equity investments are responsible for funding approximately 25 times the amount of enterprises funded by venture capitalists, annually. In many instances, the source for a private equity investment is an individual with considerable wealth behind him/her, thus providing essential start-up capital to high risk ventures, at their early stages. According to recent estimates, approximately 300,000 American start-up firms have obtained funding from such investors, amounting to over 20 billion USD, at 50,000 deals annually. By comparison, venture capital investors offer between 5 to 7 billion USD, at 1,000 deals annually.A private equity investor typically offers investments amounting to 10,000 USD to 500,000 USD, averaging a quarter of a million US Dollars, typically makes an investment bi-annually and invests in a group of other private equity investors.These investors are one of the most important components of the marketplace, as they fund between 30 to 40 times as many firms as venture capital investors, (estimated at between 20 billion USD to 60 billion USD, annually).

Canadians make decisions regarding their culinary habits based on the price, quality, taste and convenience of the food they purchase. Food producers attempt to meet as many of these conditions as possible, but it is quite difficult to incorporate all these factors into the final product. When trying to meet one set of these factors, inevitably another set will be lost (for example, increasing the quality of the product may frequently result in raising prices). Each consumer’s eating habits are reached by selecting and combining various parts of the factors described above, into an arrangement suitable for the consumer and his/her family.Identifying and comprehending consumer trends requires a great deal of research and analysis. All consumers are delineated into various demographic and economic categories. In other words, consumption is dependent upon a wide variety of factors, including, but not limited to, age, income level and informational asymmetries. Consistent market research is vital, towards understanding the current situation, and potential changes within, any market, including but not limited to consumer demographics, income/spending levels and patterns. As demographic and cultural diversity grows, along with average income levels, firms must be ready to tap into new market opportunities.

The potential for MF industry to grow is huge. Currently 77% of the investments in mutual fund come from super metros and Tier I towns. The scenario is most likely to change with everyone expanding. SBI MFalone has more than 100 points of acceptance across India, 28 investor service centers, 45 investors service desk and 52 district organizers, a base of over 20,000 agents currently. SBI’s branch network, which is one of the widest networks in the country, as well as India Post and offices of CAMS, is a part ofthis distribution network. Reliance and HDFC are believed to have plans to have their presence in 400places. UTI already has probably the largest network. The strategy, firstly, is to increase the penetration tocover Tier II-Tier III cities and rural areas. Secondly, complementary to the first idea, enhancing investoreducation and awareness initiatives by the industry is getting high priority. Savvy fund houses are increasing appropriate technological infrastructure in rural areas and strengthening alternative distribution networks. Recent regulatory changes may have temporarily brought despondency to the distribution channels but in time suitable strategies (including fee for advisory) will restore balance. Investment is an area where consultation is very important; the direct route will be used by very few investors.

What is needed is standardization of operational areas and services like inner fund house swaps, common Portals providing single view of investments with the entire industry, uniform and pooled customer education including investor communication. The country is enjoying robust economic health. This is due to the efforts of all citizens including the farmers and small workers in the most rural of rural India. The capital market owes its rise to these humble workers as much as to any one else. Therefore, the India story cannot be called a success unless these people too can partake in the capital market boom. The only way to do this is through mutual funds and it is the distribution which has to deliver. This can happen only with the support of the regulator and the industry.

Is it Necessary to Relocate your Business?

Entrepreneurs frequently debate the necessity of relocating their organizations. As available space within the business decreases (due to increases in staff size and equipment levels) firms may have to consider this option, even with the costs, complications and time needed to complete it. Proper planning and implementation of relocation can greatly reduce the time needed, costs and complications.
It is always necessary to maintain one’s perspective, when moving. For example, not only should the entrepreneur consider the costs of moving, but also the possibilities for expansion, both in its current location and other potential locations. Another important issue is the firm’s stock of furniture and equipment; if these items require significant upgrading, it may be wiser simply to sell the equipment, as opposed to pay for moving them.

Next to the timely and correct implementation and transposition of European environmental law in the European Union’s Member States, its correct application is an area of particular concern for EEB. The European Commission has recognized that “Laws do not serve their full purpose unless they are properly applied and enforced”. Citizens expect that the European acquis adopted through the Community method is respected and applied otherwise the foundations of the EU will be compromised and questioned. “The European Institutions and the Member States should continue to develop their work to ensure that Community law is correctly applied and implemented”. The European Parliament has also recognized the problem of the uneven application of European legislation in this field which is, to a large degree, due to the disparity between inspection systems in the Member States and the lack of a functioning monitoring system as well as a lack of training and information of people working in the judicial system.

Together with compliance indicators, compliance and enforcement strategies one tool to supervise and improve compliance and to ensure that European environmental law is applied in a consistent way is the supervision of compliance trough environmental inspections. In recommendation 2001/331/EC4 the EP and the Council determined the minimum criteria for environmental inspections in the Member States. Those were to be applied as a common basis for the performance of environmental inspection tasks on a national level. According to this document environmental inspections entail the following:

  • Checking and promoting the compliance of what is called “controlled installations” with EU environmental requirements.
  • Monitoring the impact of “controlled installations” on the environment.

To this end, activities like site visits, monitoring compliance with environmental quality standards, assessment of activities and operations at the installations, checking of relevant records and other activities are envisaged as part of environmental inspections. The recommendation demands that the Member States plan their environmental inspection activities in advance and that those plans cover all installations covered by the document. Also criteria for on-site visits and investigations of serious accidents, incidents and occurrences of non-compliance are established.
Regarding sustainability it is meeting the needs of the present without compromising the ability of future generations to meet their own needs. The term takes into account environmental and social performance in addition to financial performance – the “triple bottom line.” Sustainability is a term that is gaining popularity and is often used synonymously with the terms green, citizenship and corporate social responsibility.

The current state of European legislation

Member States were requested to report to the Commission on their experiences with the operation of the 2001 recommendation. On the basis of the reports in late 2007 the Commission issued a communication dealing with the review of the recommendation. In the communication, the Commission declares that the information received from the Member States was in many cases incomplete or difficult to compare. In any case, it was clear that only very few Member States had and have reached a full implementation of the recommendation. Therefore the communication sets out areas for an improvement of the original recommendation.
Particularly relevant for the development of a European environmental inspections regime was the statement that the Commission does not consider it appropriate to transform the criteria for environmental inspections into legally binding requirements. It rather recommends that, next to a non-binding recommendation, specific legally binding requirements for the inspection should be included in the sectoral pieces of legislation in order to increase the flexibility of the criteria to be applied on different installations. For instance, it has been supported by the European Parliament and the Member States that a regime for inspections with minimal frequencies shall be introduced for installations covered under the IPPC Directive, currently under revision (Proposal for a Directive on Industrial Emissions).

Seveso II type installations need to be inspected at least annually

This position was opposed by the European Parliament which, in a non legislative resolution, rejected the Commission’s proposal for only sectoral binding requirements and called for a Directive on environmental inspections to be prepared by the Commission before the end of 2009. The position of the European Commission is inconsistent taking into consideration its views expressed in the mid-term review of the 6th Environmental Action Programme where it states:
“only by ensuring the correct implementation of the acquis will it be possible to realise environmental objectives. Effective implementation is also a key element of the better regulation agenda and is needed to avoid a distortion of competition and to keep the single market running smoothly”.
An ineffective compliance and implementation of the environmental acquis compromises the achievement of environmental protection goals, distorts competition, damages the credibility of EU institutions and weakens the rule of law.

Automobile Industry was delicensed in July 1991 with the announcement of the New Industrial Policy. The passenger car industry was, however, delicensed in 1993. No industrial license is required for setting up of any unit for manufacture of automobiles except in some special cases.

The norms for Foreign Investment and import of technology have also been progressively liberalized over the years for manufacture of vehicles including passenger cars in order to make this sector globally competitive.

At present 100% Foreign Direct Investment (FDI) is permissible under automatic route in this sector including passenger car segment. The import of technology/technological upgradation on the royalty payment of 5% without any duration limit and lump sum payment of USD 2 million is also allowed under automatic route in this sector. With the gradual liberalization of the automobile sector since 1991, the number of manufacturing facilities in India has grown progressively.

According to the latest data available from Society of Indian Automobile Manufacturers (SIAM), the overall production data for April-August 2010 shows production growth of 32.38 percent over same period last year with industry producing 7,063,063 vehicles.

Automotive Industry comprises of automobile and auto component sectors and is one of the key drivers of the national economy as it provides large-scale employment, having a strong multiplier effect. Being one of the largest industries in India, this industry has been witnessing impressive growth during the last two decades. It has been able to restructure itself, absorb newer technology, align itself to the global developments and realize its potential. This has significantly increased automotive industry’s contribution to overall industrial growth in the country.

The automotive industry (including components & tyres) has already attained a turnover of Rs. 2, 20,600 crore. The industry provides direct and indirect employment to 13.1 million people. The contribution of the automotive industry to GDP has risen from 2.77% in 1992-93 to 4.14% in 2008-09. The industry is also making a contribution of 17% to the kitty of indirect taxes of the Government.

One of the dynamic and interesting industries whereas every day is a race to beat the competition. You’re under pressure to improve the way you operate, to make the most of your investments and to reduce your financial risk.

Our services focus on assisting our firms’ clients to address key issues facing the automotive industry including:

  • Reporting and regulation.
  • Sustainability and the environment.
  • Plant location, closures and relocation.
  • Emerging market companies.
  • Evolving distribution channels.
  • Consumer trends.
  • Private equity investment.
  • Improving operational efficiencies.
  • Market entry and expansion.
  • Business operating model structure.