Micro Level Trends – India Autos (Part 3) – VM's Alignment to the New Economic Headwinds

Having reviewed the fantastic growth story in India over the past decade (in Part 1) with recognition that the country's Automotive Mission Plan (AMP) must be truly strategically holistic, not 'part-picture' over-reactionary, and must be driven by competitive forces operating in ever more liberal auto-markets (in Part 2); this final weblog reviews the present strategic, operational and financial positions of the prime corporate players.

This done with the primary intent of better understanding those companies which may benefit by, or falter from, the growing concern of economic slowdown in India as a result of an increasing troublesome global economy.

The present picture shows s general decline of economic activity across the previously very brsk BRIC regions, with only the 'Next 11' countries showing buoyancy, yet these as a whole cannot off-set the broader EM markets slowdown. Those markets of course are still starkly buoyant compared to the Triad regions, but having experiences spiralling costs and diminishing competitive advantage relative to the historic global norm, themselves are undertaking macro and micro-level actions as the reality of a new 'self-preservation' period becomes part of the mid-term new norm.

The only region which shows (paper-based) growth traction is the USA, yet that growth will have been, and will continue to be, self-generated as the multiple QE programmes slowly release liquidity through Wall Street and into 'Main Street' America. However portions of that liquidity – investment-auto-motives believes – will be effectively held in reserve for mid-term drip-feed injection into those foreign lands which require reconstruction, ie the S. Mediterranean countries and North Africa in particular.

[NB Nonetheless, in the ethos and interests of true globalisation, the restructuring of the Eurozone and North Africa should be undertaken with agreed liquidity levels drawn from from the US, GCC, Brazilian, Russian, Indian, SE Asian & Chinese participants].

Thus even the US, as a consequence of its new era 'soft-power' policy will see immediate growth heavily restrained, with the possibility that any good-news economic indicators, which provide momentary optimism, may be under 'expectational par' or may need re-publishing. And, as mentioned previously, that necessary sizeable US corporate spending will be directed at US companies, as part of a more easily managed homeland restructuring process that both aids overall control and critically allows for value-creation to be seen to be working and witnessed at the Wall Street level.

Across the world then, in the short-term the previous demand for Indian goods and services will naturally diminish as each country seeks to replicate the US restructuring model, also recognising that home-grown growth will be a lead agenda issue, so leading to greater repatriation of trade flows, the self-sufficiency theme becoming increasingly common.

Whilst undoubtedly India will continue to export its goods and services – continuing to do so in autos – the general picture indicates one of reduced reliance on exports and imports and thus a case of 'battening down the hatches' across the corporate world, to ride the incoming choppy waves.

However, those Indian companies with noted North American presence will start to try and create balanced equations, restructuring and leveraging their own domestic cost-base so as to invest more in NA and so grasp opportunities to win US tendered contracts. Well managed - ie still heavily cost constrained - US exposure will then be seen in a positive light by institutional, PE and individual retail investors.
The Auto-Market Outlook (2012-13) -

As noted by sector participants, India impressive 2008-10 rebound was shaken by world events, namly Japan's Fukushima disaster and the MENA 'Arab Spring'; with more recently the Thailand floods. The 2010-11 Indian accounting period (March – March) was then shaken from its previous optimism, the last 2 quarters (Indian Q1 & Q2) providing greater concerns given the deepening of Eurozone* worries and reaction from Asian capital markets.

[* Please see post script]

The global economic headwinds facing India will result in contraction of vehicle sales to the private sector. Thus it is expected that hardest hot will be passenger cars, especially by those who were to be first time buyers, postponing purchase until the future looks brighter. Motorbikes, mopeds and scooters may also see contraction as buyers think twice, but here the demand curve will be less elastic given the lower price of these items compared to cars. Of greater importance will be the pricing effect of less new car sales on used cars, the latter typically seeing a rebound in values as people stay in used car territory yet the affordability factor still draws people upward from motor-cycles into the territory, thus used cars set to experience a dual inflow effect that will maintain residual values; that level dependent upon the level of contraction that new car sales ultimately experience.

Government departments and SME company buyers constitute a far greater percentage of new passenger sales than in western or Triad countries, so the 'fall-off' effect in unit should not be dramatic, but the contribution made by the private car purchaser may see a sharp decline, especially when it is noted that corporate budgets and spending are to be tightened, so affecting the now usual expectation of inflation related salary rises and the possibility of management and staffing levels.

In the distinction between small passenger cars and larger SUVs, given that the former are typically the domain of private buyer whilst the latter are typically bought by small company director, it will be those manufacturers serving 'the masses' that suffer proportionately more.

This then primarily affects the large small car exposure of TATA Motor and Maruti-Suzuki, with those operating in the fringes offering smaller older model small SUVs such as Premier Motor especially exposed. More lightly affected will be Hindustan Motor (Mitsubishi) compact sedan car sales given habitation of a different sub-segment with higher prices and lower volume expectantly purchased by the small company director set.

Whilst the expected broad economic contraction will then more heavily affect small cars, it should favour those companies which produce motorcycles, mopeds and scooters for the broad sweep of private, corporate and government sectors, the private and corporate buyers more likely to view the direct substitutional effects of 2-wheels vs 4-wheels.

In contrast to the passenger car market the Indian B2B Commercial Vehicles market, related to 3-wheelers, mini-CV, Light CVs Medium CV and possibly Heavy CV should remain buoyant as it is expected that the corporate world's spending cuts will not be as deep or quick as that of the private buyer. There may be concern regards the sale of the largest HGVs given the substantial outlay and investment recouperation / breakeven timespan; but any cancellation of orders in this sub-segment should provide for a boost in those below as fleet managers alter their fleet mix to suit the 'adaptability needs' any B2B downturn would require.

As a result, investment-auto-motives would advise investors to expect a 6-8% drop off of passenger car sales for the Indian FY2011-12, seeing a 12-15% fall in small cars specifically.

In contrast 2-wheeler sales may see a 5% improvement due to the size of the ongoing consumer wave in the segment less prone to reaction because of its affordability and the sports-bike sub-segment seeing a maintained boost as people deny themselves the new small car.

All the while, the commercial vehicle sector should remain ostensibly flat across all its sub-segments.
Balancing Growth & Fundamentals Analysis -

Consequentially, investors and analysts will necessarily need to modify and re-orientate their investment criteria. From that of wholly growth centric, focused heavily on on profitability ratios, efficiency ratios and market ratios, to encompass greater 'weight' given to liquidity ratios, activity ratios and indeed the 'foundational level' finances of companies which sit throughout the auto-sector value chain, either as part of (typically family led) conglomerates or as singular entities.


Company Reviews -

The following provides brief description and analysis of the 9 major players which span the truck/bus, car, 3-wheeler and 2-wheeler segments; each company typically operating across 2 of these distinctly separate sub-segments.

- Maruti-Suzuki
- Hindustan Motor
- TATA
- Mahindra & Mahindra
- Ashkok Leyland
- SML Isuzu
- Force Motors
- Bajaj Auto
- Hero MotoCorp

[NB 1 Lakh = R10,000 and 1 Crore = R10,000,000)


Maruti-Suzuki India Ltd (MSIL) –

Background
- 1970 creation of a private limited company named 'Maruti Technical Services Private Limited' to offer create value chain for "a wholly indigenous motor car".
- 1971 “Maruti Ltd” created the following year.
- 1977 scandal regards misdirected funds, near collapse. I
- 1981 partnership deal with Maruti Udyog Ltd and SMC of Japan.
- 1983 license of Suzuki Maruti 800; first modern/affordable small car.
- later licence of Suzuki 4WD appeared vehicles.
- 1988 first plant expanded to 100k units pa.
- 1991 - beginning of the liberalisation era – 65% of components 'Indian Made'.
- 1992 Suzuki increased its stake to 50% (with 50% nationally held).
- Capacity grew to an additional 200k units with new second plant..
- 1997-8 friction between Suzuki and Maruti Udyog regards “government proxy”MD.
- 2000s expansion of product portfolio to retain position as No1
- 'horizontal' expansion and integration policy implemented
- increasing competition from domestics and foreign (esp Hyundai Motor No2)

Strategy
The present BoD is led by MR R.C. Bargava (Chairman) and Mr Shinzo Nakanishi (MD & CEO).

The company's success is a consequence of its parent companies scale and international leverage, consistent model renewal provided a story of ever growing market grasp across car, small utility and small 4WD /SUVs, with product range expansion creating/capturing new markets. Complimentary new initiatives such as an Emergency Rescue Service and by 2000 a Customer Call Centre and creation of a (PPI funded) National Driving School, Insurance Services and Financial Services for dealers and car-buyers. 2003 saw an IPO on BSE and NSE. 2005 its 5 millionth car.
The company has two manufacturing facilities located at Gurgaon and Manesar, south of New Delhi, India. Both the facilities have a combined capability to produce over a 1.2 million units pa, and there are plans to expand its manufacturing capacity to 1.75 million by 2013.

Operations
Since June, labour unrest in the 2 Haryana plants has undermined production, public confidence and market share. The face-lifted Swift model (a prime seller) has faced delivery shortages and so cancelled orders & migrated sales during the Diwali festivities, a peak sales period. This added to increased input costs squeezing margins, and high interest rates undermining sales volumes has made the Indian Q2 painful, Maruti's market share declining heavily. This adds to previous market share slide already underway, now Hyundai taking 21.7% market share, TATA Cars 16.4% and Mahindra 11.7%.

Financial:
Those sales provided for a 2010-11 (vs 2009-10):
Net Income of Rs3,61,282m (vs Rs3,01,198m).
Net Sales of Rs41,467m (vs Rs44,510m)
PbT was Rs31,088m (vs Rs35,925m)
PaT was Rs22,886m (vs Rs24,976m).
EPS of Rs79.22 (vs Rs86.45)

Operating Margin of 8.6% (vs 11.9%)
[using PbT / Turnover less Excise Duty]
Hindustan Motor -

Background:
- flagship division of Birla Technical Services (of Birla Group).
- Birla Group (Birla family), commercial roots in India reach back to 1857
- (Technical Services division also specialises in oil and gas).
- 1942 Hindustan Motors established in Gujurat, ,
- moved to West Bengal and later moved HQ to Kolkata.
- known for the long-standing Ambassador car (long used by government and taxi operators)
- 'Indian establishment' roots gave SVO arm for vehicle armouring.
- enters JV with auto-parts company Sriram Group

Strategy:
Led by C. K. Birla (Chairman) and Manoj Jha (Managing Director), Hindustan Motor operates what its states to be ”the first and only integrated automobile plant in India: the Uttarpara factory, popularly known as Hind Motor.

The company operates a twin-mode business template, manufacturing for itself and offering contract production for another. It makes and sells the Ambassador (in sedan & pick-up forms) and the 'Winner' mini-truck. Also operating an alliance deal with Mitsubishi vehicles. Thus its can be said to notionally span a number of sub-segments: Fleet (Government, Taxi, Other), LUV (with incursion into 3-wheeler territory), passenger cars (via Mitsubishi) and SUVs (via Mitsubishi). It operates 3 plants in Utterpara near Kolkata (Ambassador), Pithampur in Madhya Pradesh (Winner mini-truck) and Tiruvallur near Chennai (contract manufacture for Mitsubishi products).

Given that it has a broad vehicle mix and dual-client manufacturing base, the company is no doubt viewed by Indian analysts as typical of the broad exposure mentality reflected in the bigger conglomerate - indeed Indian mentality. Reducing higher risk, cyclical exposure to specific segments, and so enabling an income off-setting.

However, the ongoing natural sales decline of Ambassador (in both segments) has and is a cause of real concern, with an apparent 20% plant utilisation. HM mentioned the launch of a smaller model based on the Ambassador, though it seems very dubious and unlikely that a new car would be developed on this basis, seemingly a PR story to maintain dealer confidence. In mid 2011 it mentioned manufacture of a niche (what it calls) 'James Bond' Mitsubishi product, which again appears 'over-selling', though perhaps alluding to a special series of the Evo.

Its stated aim is to rebalance the present 80:20 CV vs Cars bias, and to re-fill its 50k unit pa capacity. Exactly how it will do so is currently questionable, though the Ambassador pick-up (Veer) available in body-side and flat-bed versions should provide a much needed volume boost from its current low, if marketed with adroitness possibly doubling or more of volumes. Whilst 'neither fish nor fowl' (car or forward control truck) it is a very worthwhile low-risk exploration to assist turnaround, and may give a whole new lease of life to Ambassador.

Financial:
Those sales provided a 2010-11 (vs 2009-10):
Net Income of Rs 85,004.15 lacs/lakhs (vs Rs 73,688.03 lacs).
Net Sales of Rs 66,152.71 lacs (vs Rs 57,404 lacs)
PbT was Rs -376.12 lacs (vs Rs -3326.37 lacs)
PaT was Rs 75.23 lacs (vs Rs -5,110.02).
EPS of Rs 0.05 (vs Rs -3.17) lacs

Operating Margin of -0.44% (vs -4.5%)


TATA Motor –

Background:
- founded in 1945 (formerly TELCO) to produce locomotives.
- first road based commercial vehicle created in 1954 with Daimler-Benz.
- Over four decades effectively held Truck duopoly with Ashok Leyland
- 1991 Liberalisation forced diversification into MUVs/SUVs and later Cars
- sold over 4 million vehicles in India sold since.
- part of TATA Group (Steel, Autos, Consulting, IT, Data, Telecoms, Chemicals, Energy, Hotels & Tea).

With an HQ in Mumbai, TATA Motor has tended to be the more progressive (first mover) amongst India's VMs, a necessary stance given the competitive landscape. Between 1998-2008 the decade long focus was on developing SUV and small car capabilities. This since followed by the M&A era.

2004 – Daewoo Truck (South Korea).
2005 - (21% of) Aragonese Hispano Carrocera (Truck & Bus) (Spain).
2007 - Marcopolo Coach (Brazil)
2007 – FIAT (JV) India
2008 – Jaguar Land Rover (Premium Car & SUVs) (UK) [inc Daimler & Lanchester brands].
2009 - Hispano Carrocera (full takeover)
2010 - (80% of) Trilix Engineering (Vehicle Development) (Italy)

TATA Motor is dual-listed on BSE & NYSE stock markets

Strategy:
The ten member BoD members are led by Ratan Tata (Chairman) and Ravi Kant (Vice-Chair).

Given the broad-based acquisition spree over the preceding 6-7 years the company will be in the midst of consolidating the efficiency of ownership to reap rewards as soon as possible. These interests provide for greater global coverage, new vehicle absorption to replace & extend the domestic range, entry into new segments, access to advanced engineering materials and methods and capture of best practice processes. So the task of ongoing incorporation of foreign companies into the TATA fold, whilst in parallel circulating Indian management & employees in those firms.

As part of TATA's desire to climb the value-curve, R&D in powertrain and structures appears to take priority, no doubt deep learning made available from JLR & FIAT (in steel & aluminium** see post script) and (deisel & petrol), not only assisting TATA branded NPD in Cars, SUVs and utility 4WDs, but feasibly bearing technology transfer fruit for the Truck and Bus divisions.

Much of TATA's apparent alternative, progressive attitude is exemplified via its Nano model, which though unorthodox in wheel size and engine rear location, may well be viewed as much symbolic as commercial. Like the original Mini, the car has been slow to be accepted, and as such will require ongoing financial support until it is seen as a true alternative to a used conventional car. That car's sales totals to date crossed 100,000 units in 2010-11.

R&D work has been directed at EV models and exploration of Compressed-Air Car, but the former will presumably only be purchased by an eco-conscious government and companies whilst the latter has equal (indeed greater) fundamental functional shortcomings.

Strengthening the Sales & Service Network to support new products will be key, since although
Tata Motors has >250 dealerships in >195 cities across 27 states and 4 Union Territories of India, this ranks 3rd after the bigger Maruti Suzuki and Hyundai networks.

Manufacturing and assembly plants are located in Jamshedpur, Pantnagar, Lucknow, Sanand, Dharwad and Pune, India, and internationally, in Argentina, South Africa, Thailand and the United Kingdom.

The company's consolidated FY2010-11 results (ending March 2011) illustrated that worldwide sales grew to a record of 1,080,994 units, equal to 24.2% YoY growth. Of these TATA Motor branded vehicles (all types) reached 836,629 units, representing a growth of 25.2% . In the domestic market, CV sales increased by 22.7% year-on-year to 458,828 units (vs 373,842 the previous period), its market share a reported 61.8%. Passenger vehicles, including FIAT and Jaguar & Land Rover vehicles distributed in India, grew by 23.0% year-on-year in the domestic market to 319,712 units (vs 260,020 in 2009-10), market share at 13.0%. Exports rose to 58,089 from 34,109.

Sales of the TATA passenger vehicles sales crossed 2,000,000 since inception, in FY 2010-11.

Financial:
Those sales provided 2010-11 (vs 2009-10):
Turnover of Rs 51,902.93 crore (vs 38,144.83 crore)
Net Sales of Rs 47,807.42 crore (vs Rs 35,373.78 crore)
EBIT of Rs 3,487.63 crore (vs Rs 4,853.83 crore)
PaT was Rs 2,196.52 crore (vs Rs 2,829.54 crore).
EPS of Rs 30.28 (vs Rs 42.37)

Operating Margin of 7.3% (vs 13.7%)


Mahindra & Mahindra –

Background:
- founded in1945 in Ludhiana as Mahindra & Mohammed, by brothers K.C. Mahindra, J.C. Mahindra and Malik Ghulam Mohammed.
- 1948 the present name was established.
- initially processing steel, took the license for the Willys JEEP
- developed tractor section, then MUVs, CVs, SUVs, Pick-Ups, Cars & 2-wheelers
- today a subsiduary of Mahindra Group (Autos, Aerospace, Agribusiness, Construction, Defense, Energy, Finance, Insurance, Industrial Equipment, IT, Leisure, Hospitality, Logistics, Property & Retail).

The company seeks to use its sizeable domestic presence and well known brand to both attract JV partners by which to either contract produce, or itself enter new auto-segments, using its typically Indian 'roll-over profit' balance sheet reserves for M&A purposes.

2000 – Ford Ikon/Classic (ended 2011)
2005 – Navistar/International Truck, (USA)
2007 - Renault/Dacia Logan (France, Romania) [the M&M Verito].
2008 – M&M Scorpio CKD agreement with Bavarian Auto Group (Egypt)
2009 – M&M Pick-Up models CKD agreement (Brazil)
2010 – Reva EV (India)
2011 – M&M purchase of Ssangyong Motor (S. Korea)

Strategy:
The BoD lead members are XXXXX (Chairman) and (Vice Chairman) and Rajesh Jejurikar (CEO). Dow Jones Newswire reports that Jejurikar has resigned but will stay in situ until January 2012.

Much of this external learning allowed M&M to undertake its own small SUV project (code-named W201), to be released as the XUV 500, and it says is a platform that “could be used for developing more SUVs”. Beyong the domestic market, M&M seeks export sales in South Africa, Europe, Africa, Australia and Latin America. This then 'book-ends' the mid and large sized SUVs acquired from the Ssanyong acquisition, providing a broad and relatively modern SUV portfolio.

Operations:
The XUV500 better naturally mates with the Verito car model (from Ranault Dacia), however that JV relationship looks to have been under strain when reading between the lines. One M&M exec states that..."a little over a year ago we took over the platform and brand from Renault. That time we used to sell 300 units per month and now we are at 1,710 units, so we have been able to grow in the sedan segment”...indicating that sales were previously suffocated and latterly promoted.
The REVA EV is set for introduction at some point, but it looks to realistically be little more than a PR exercise producing limited numbers for Indian eco-projects and EV enthusiasts amongst the metro elite, thus re-running the 'big-exposure but small-impact' story seen in the UK and Europe.

Building on its competencies in Farm Equipment, Mahindra Tractors(China) Co. Ltd. Was established to manufacture tractors for an expanding Chinese market, and is used as the export portal to the USA and elsewhere. It maintains its No1 domestic position, August 2011 sales up 21% YoY at 15,059 units.

The 2-wheeler business has experienced production problems, the launch new Stallio motorcycle having been postponed 3 times, but still set to ride the sector's ongoing positve growth story.

Like TATA, the company has increasing worldwide presence: Mahindra Europe Srl. based in Italy, Mahindra USA Inc., Mahindra South Africa & Mahindra (China) Tractor Co. Ltd.

Mahindra & Mahindra Limited is listed on the BSE.

Financial:
Those sales provided for a 2010-11 (vs 2009-10):
Turnover of Rs 24,850.22 crore (vs Rs19,832.06 crore)
Net Income of Rs 22,757.51 crore (vs Rs 18,038.05 crore).
EBIT of Rs 3,402.13 crore (vs 2,756 crore)
PaT of Rs 2,662.1 crore (vs Rs 2087.75).
EPS of Rs 46.21 crore vs Rs 37.97 crore)

Operating Margin of 11.7% (vs 8.64%)


Ashok Leyland -

Background:
- founded in 1948 as Ashok Motor to assemble Austin cars
- 1955 onward a focus on commercial vehicles
- equity split with Britain's Leyland Motors, using Comet truck as base for bus product
- nationwide success amongst public and private bus operators
- replaced by the bus specific Tiger model and by Titan double decker.
- 1980s onward similar business model for Trucks, with FIAT & Ford UK
- and with Engines with (Toyota) Hino.
- since 1987 the company has been a flagship subsidary of the Hinduja Group (Foundries, Autos, Defence, Oil, Banking, IT, Media, Health)

Ashok Leyland, may not be aswell known to non-Indian observers as TATA, but is renowned as India's Truck and Bus producer, with additionally the assembly of Emergency & Military vehicles, Components and Engine Sets for Marine & Industrial applications, and more recently inclusion of a Power Sets section for independent static based power generation. To date its basic business model to buying the licence and tooling for previous generation vehicles and engine sets.

The 'old tech' products have historically been embraced by smaller truck and bus operators for 'repairability' (depot and roadside) but the brand had been increasingly seen as aged 'old India', something recognised internally in the early 2000s. To combat JVs and acquisitions were embarked upon:

- 2006 acquired Avia (Czech Republic) [Avia Ashok Leyland Motors s.r.o]
- 2007 JV with Nissan
- 2010 acquired (26% stake) in Optare (UK)
- 2007 JV with Nissan Motor

Strategy
The main BoD members sit in the Chennai HQ, and consist of Mr Dheeraj Hinduja (Chairman), Mr R Seshasayee (Exec Vice- Chairman) and Mr. Vinod Dasari as the Managing Director. Mr Hinduja replaces Mr R J Shahaney who recently stepped down as Chairman.

It has been stated that Avia will providing a foothold in the highly competitive European truck market, and has major room for improvement given that recently its output is only 20% capacity (1,200 units in 2009-10). However, the EU+ truck sector is very competitive, with entrenched players and buyers, so although A-L may obviously see ramp-up potential, invetsment-auto-motives suspects that ultimately Avia tooling etc will be taken to India and serve A-L's own-brand ambition.

The buy into Optare - which specialises in the smaller class of urban 'runabout/hopper' bus – looks to take advantage of the growing trend for smaller local area and intra-urban routes, and to take advantage of the needs of the school, college & university sector and organisations that require daily route-pick-up and drop-off transport for its students, staff and members. Optare also has apparently made advances in hybrid powertrain, a system better suited to small bus segment, thus also useful for A-L's own R&D.

The agreement with Nissan was to create 3 linked companies for: a) vehicle production, b) powertrain production and c) mutual development, A-L holds a 51% majority stake in vehicle production, Nissan 51% in powertrain and equal 50:50 split in development.

Rated as No2 in In Trucks (after TATA), A-L spans 7.5 – 49ton classes. Historic focus was in the 16 - 25 ton segment, but this broadened into the lower LCV class via the Nissan JV. However, A-L is noted as No1 Bus producer, with capacities spanning 19 - 80 seaters.. It has 7 production plants. 2008 annual sales were about 60,000 vehicles, and about 7,000 engines. 2008-9 sales of 54,431 medium and heavy vehicles. 2010-11 sales of 94.100 units. Presently it has a build capacity of 105k units p.a. And is rated about 20th in world rankings of truck company size.

Ambitions are to become a global Top 10 player, with aspirations of doubling its sales of MCV and HCV output over the next 5 years, this underpinned by its level of investment in fabrication & machine tools and production engineering, Vinod Dasari remarking that over 80% of A-L vehicle output is made from plant machinery 5 years old or younger.

R&D has spanned all electric, hybrid, CNG and H-CNG (20% Hydrogen), whilst new CapEx projects include a new plant in North India and a Bus Body assembly plant in mid-east Asia.

Thus we see that A-L seeks to continue its historic trend of purchasing 'ready-made' vehicles from foreign sources in order to directly buy product types suited to Indian market trends and absorb best practice & technical advances, whilst simultaneously contract manufacturing for others so as to also gain exposure and capture additional technology knowledge.

Financial:
Those sales provided for a 2010-11 (vs 2009-10):
Net Income of Rs 11,117.71 crore (vs Rs 7,244.71 crore)
PbT was Rs 801.8 crore (vs Rs 544.78 crore)
PaT was Rs 631.3 crore (vs Rs 423.63 crore).
EPS of Rs 4.75 (vs Rs 3.18)

Operating Margin of 7.2% (vs 7.5%)


SML Isuzu -
(previously Swaraj Mazda)

Background:
- established in 1983 as Truck sector parallel to ambitions of Maruti Suzuki
- previously owned by Sumimoto of Japan and Punjab Tractor
- Sumimito buys-out Punjab Tractor
- creates capabilities in task-specific variants of MCV vehicles
- develops capabilities in HCV via Isuzu
- majority share (54.96%) held by India's Promoter Group

SML Isuzu manufactures LCV / MCV, Luxury Bus (Coach) and Special Vehicle products. It offers vehicles from both SML and Isuzu branded stables; the former serving the plethora of generally smaller trucks and buses and variants for organisation based clients at a lower price level, whilst the latter serves a smaller higher priced markets for larger truck and coach. Plans are to access the new sectors of: multi-axle trucks, refridgerated trucks and articulated-truck tractor-cab units, also seeking to offer the Isuzu D-Max pick-up.

The company's HQ is in Chandigarh.
It is not publicly listed for open share sales.

Strategy:
The BoD is led by Mr SK Tuteja (Chairman) and Mr Y. Watanabi (MD & CEO).

In fiscal 2010-11, the Commercial Vehicle (CV) Industry experienced sales of 7,53,000 units
(vs 5,76,400 units a year previously). Within the 5.0 ton to 12.0 ton GVW segment in which SML Isuzu operates, sector sales reached 99,500 units (vs 83,000 units) thus 13.2% of aggregate volumes. Of these the company sold 12,870 vehicles (vs 10,133 units previously), a record volume,
with an increase in market share to 13% (vs 12.2%). Vehicle sales plus spare part sales provided record revenue.

However sales targets set were not reached, and consequently, capital expenditure for a luxury coach expansion project was restricted for the time being. Furthermore the expected level of segment sales for luxury coaches failed to meet expectations, thus of the Rs1800 lahks monies that were to be utilized by March 2011, only Rs.321.70 lacs is to be spent.

The increasingly constrained macro-environment thus set a cautiously optimistic strategy using lower key product and sales initiatives across H1 of 2011-12.

Financial:
Those sales provided a 2010-11
Net Income of Rs.893.0 crores (vs Rs. 722.2 crores)
PbT was Rs.51.4 crores (vs Rs. 30.4 crores)
PaT was Rs36.55 crores (vs Rs21.46 crores).
EPS of Rs25.26 (vs Rs19.44)

Operating Margin of 5.7% (vs 4.2%)


Force Motors –

Background:
- founded in 1958 as Firodia Tempo Ltd by N.K.Firodia
- originally licensed German Hanseat 3-wheeler & Matador truck
- renamed Bajaj Tempo after partial acquisition by Bajaj Auto

Today the company's portfolio includes 3-wheelers, Tractors, Mini-Trucks, MUVs, LCVs, Vans, Trucks, latterly SUV and a desire to capture a portion of the MPV segment and ambitions for a premium SUV

Strategy:
The BoD's primary positions are held by Abhay Firodia (Chairman) and Prasan Firodia (M.D.),

As with much of the Indian auto-sector, Force Motors has historically bought the licence to manufacture previous generation vehicles from western VMs. The same route for engine sets, with a simultaneous effort to contract manufacture engines for others, such as Daimler.

- 2008 50:50 JV with MAN Trucks in HCV segment (“MAN Force Trucks”)
- 2011 announced MPV using (Vito) Daimler platform (for Van & MPV variants)

The 2010-11 Annual report noted that the 2009-10 growth story continued, with growth across all the segments Force Motors operates within. It welcomed the “rising standards of competition, technology, environmentalism and safety”, seen as beneficial to the auto-industry's ongoing improvement. Force Motors sold: 19,822 LCVs (inc small vehicles), 6,215 of MUVs (Multi Utility Vehicles), 1,013 Tractors

Exports saw growth in 2010-11 vs 2009-10, to a value of R27.17 crores from R26.96 crores, helping to fund technical consulting assistance commissioned from Germany via an independent expert, Mercedes-Benz Project Consultation GmbH and MB Technology GmbH. R&D for tooling and project costs were 2.26% of company turnover.

A labour relations legal case with Pithampur Plant staff is ongoing but cordial relations remain on the shop floor itself thus not expecting any disruption in production.

Financial:
Those sales provided a 2010-11

Net Income of Rs 1481,43,74,099 (vs Rs 956,03,39,962).
PbT was Rs 82,13,21,341 (vs Rs 42,88,48,470)
PaT was Rs 58,61,78,955 (vs Rs 60,42, 25,926).
EPS of Rs 44.49 (vs Rs 45.86)

Operating Margin of 5.5% (vs 4.5%)


Bajaj Auto –

Background:
- established by Jamnalal Bajaj in 1926 with imported vehicles
- Kamalnayan Bajaj (son) leads from1942.
- Baja Auto formally incorporated in 1945.
- 1959 licence granted to manufacture vehicles
- 1960 IPO
- Rahul Bajaj leads from 1965.
- 1970 sees 100,000th vehicle produced
- 1977 sees 100,000 vehicles produced that year.
- broadened products from (business) 3-wheelers to (consumer) 2-wheelers.
- model improvement and new product expansion
- a division of Bajaj Group (Iron & Steel, Autos, Home Appliances, Lighting, Travel, Insurance, travel & Finance).
- the demerger of Bajaj Auto Ltd into three separate corporate entities:
Bajaj Finserv Ltd (BFL),
Bajaj Auto Ltd (BAL), and
Bajaj Holdings and Investment Ltd (BHIL)—

Bajaj's association with 3-wheeler tuk-tuks is renowned, with its previous expansion into 2-wheelers a natural expectation to broaden the business base and lessen reliance upon a largely commercial marketplace.

Its HQ is in Pune, with production plants in Pune, Uttarakhand and Waluj Aurangabad.

Strategy:
The BoD is led by Rahul Bajaj (Chairman since 1965), Madhur Bajaj (Vice Chairman) and Rajiv Bajaj (MD) and supported by Sanjiv Bajaj (Exec Dir), Shekhar Bajaj (Dir) and Niraj Bajaj (Dir).

The 2008 buy into Austrian bike-maker KTM - worth 40% in shareholding - provided for mutual synergies between the companies. KTM is renowned for its Motocross bikes and has further developed its Road-bike range, thus Bajaj & KTM able to undertake R&D and development together aswell as cross-sell (badge-engineered) products in their different primary markets as possible. This allows Bajaj to introduce Moto style bikes and seize the opportunity for Moto-style products as has been the major trend in Europe over the last decade (as per BMW bikes).

As a result it has jointly developed its 125cc and 250cc ranges.

[NB Furthermore KTM's exploration into street legal race-track cars with its X-Bow model provides for an exciting alternative and very tentative entry into the car market, potentially able to further boost the Bajaj brand with a unique, limited volume track-road 'race car' for emerging track-day events at the Buddh International Circuit and elsewhere. This would precurse any attempt for a similar attempt at a higher price point by Force Motor – see below].

After a failed alliance attempt with Renault to produce a competitor to TATA's Nano small car, expected low-cost small car, the idea could remotely, but possibly be born through the KTM alliance. Though a 'developmental stretch' for both parties it might produce something as, if not more radical, as Nano.

2010-11 sales were a record 3.82m units; consisting of 3,387,043 motorcycles and 436,884 three-wheelers. Exports crossed rose by 35% to 1,203,718 units.

The Chairman's own words depict the very successful 2010-11 period...”No doubt, some of this excellent performance was on account of a smart rebound of the Indian economy, which has grown
by 8.6% in FY2011 — second only to China. After all, the year saw total motorcycle sales by the industry increasing by 24% to 10.5 million units. However, sales grew significantly faster than the
market. For instance, Bajaj Auto’s total motorcycle sales increased to almost 3.39 million units. Similarly, while domestic motorcycle sales in the aggregate grew by 23% to a bit over 9 million units, domestic sales rose by more than 35% to over 2.4 million”.

Financial:

Those sales provided a 2010-11
Turnover of Rs 16931.53 crore (vs Rs 12118.08 crore )
Net Income of Rs 15998.12 crore (vs Rs 11508.5 crore).
PbT was Rs 4350.75 crore (vs Rs 2411.13 crore)
PaT was Rs 3339.73 crore (vs Rs 1703.63 crore).
EPS of Rs 115.4 (vs Rs 58.8)

Operating Margin of 27% (vs 21%)


Hero MotoCorp (previously Hero Honda)-

Background
- established in 1984 JV of Hero Cycle and Honda Motorcycles
- created to provide Indian manufacturing competence in the sector
(as per Maruti Suzuki and Swaraj Mazda).

- Mujal Bros buy-out 26% sharehold from Honda (of Hero-Honda)
- India's Promoter Group own 52.21% of Hero MotoCorp's shares.
- 2011 company renamed

The brand could be said to be the the 2-wheeled equivalent to Maruti. Created to give India an internal modern technology competence in the development and production of scooters, mopeds and motorcycles, and critically give Hero Cycle a new commercial avenues beyond diminishing use of pedal bikes.

(Thus was at the time a re-run of technical licensing previously seen with Enfield motorcycles et al, except using the Honda base of a broad product range). Its HQ is in New Delhi, and operates 3 plants; two in Haryana and in Utterakhand

It is reported that Hero-Honda has sold over 50m units in its history, and the old-new entity sells more two wheelers than its 2nd, 3rd & 4th ranked competitors combined; the Splendor model being the prime seller at >1m units p.a.

Plants are based at Dharuhera, Gurgaon in Haryana and at Haridwar in Uttarakhand, combined a capacity of 3 million units per year. HeroMotoCorp has a over 3000 sales and service points across India, and seeks to achieve revenues of $10 billion and volumes of 10 million two-wheelers by 2016-17.

Hero MotoCorp is listed on the NSE

Strategy
The BoD is lead by Mr Brijmohan Lall Munjal (Chairman) and Pawan Munjal (MD & CEO)

The purchase of 100% of shares thus should provide Hero Group with an ability to capture the business' full income stream, which it hopes to boost further as the termination of the JV leaves Hero MotoCorp free to export internationally, whereas it only previously had licence to export to Sri Lanka.

However, given that it was indeed Honda technology that underpinned the JV, the new company will either need to develop motorcycle systems itself and/or rely on an external alliance.

During the fiscal year 2008-09, the company sold 3.7 million bikes, a growth of 12% over last year. In the same year, the company had a market share of 57% in the Indian market.

In 2010-11 the 2-wheeler market consisted of 13,413,312 sales (vs 10,574,835 in 2009-10),
Motorcycles represented 10,500,004 (vs 8,444,173), Scooters 2,209,595 (vs 1,559,173) and Mopeds 703,713 (vs 571,489). Hero took 54.6% of India's motorcycle market and had a 44.5% market share in scooters & mopeds, selling 5,402,444 units (vs 4,600130 the previous year) giving 17.4% growth.

Financial:

Those sales provided a 2010-11
Net Income of Rs19,670 crores (vs Rs16,099 crores).
Net Sales of Rs19,245 (vs Rs15,758)
PbT was Rs2,405 (vs Rs2,832)
PaT was Rs1,928 (vs Rs2,232).
EPS of Rs96.5 (vs Rs111.8)
Dividend of Rs105 (vs Rs110).

Operating Margin of 11.4% (vs 16.2%)


Conclusion -

The previously depicted 9 companies span the full spectrum of the Indian automotive sector.
Each has undoubtedly ridden the wealth creation wave India has enjoyed through the 1990s and 2000s, possibly an unparalleled period of Indian economic strength enjoyed by its people and corporations.

Yet the global economic headwinds that have come to the fore over the last 12 months look set to take a toll on economic well-being, something that Chairmen, MD's and CEO's appreciate. The story at Maruti-Suzuki may foretell problems elsewhere, by which a highly expectant workforce, well used to the good time years, is not yet cogniscent of the broader slowed picture, and so make unrealistic demands which in turn interupts output and the cost-base and so inadvertantly helps to undermine the corporate position, job security, local economy and wide economy health. Yet ironically at the same time such pressures mean that executives must come to grips with the fundamentals of the business, its cost base, its operational structure and strategic position..

The macro-economic headwinds however, blow over different companies in different ways, depending on their exposure to their product's general market, pricing elasticity and substitutional effect. In autos the headwinds that quickly directly effect consumer spending bode greater ill for passenger car producers, than for commercial vehicle firms, and may indeed create a consumer migration effect away from cars in general (new and used) and toward far more affordable 2-wheelers so boosting the outlook for such providers.

The accompanying graphic (at the top of screen) depicts the exposure levels of each manufacture to each vehicle segment type. It then provides a very macro-orientated view of those that are poorly, squarely, or best positioned to face the near and medium term.

The above mentioned Operating Margins for each firm and relative positions on the 'macro-map' make the basic case clear to all, (though each company of course deserves far closer consideration by investors).

It could well be another period that encourages further structural change in the Indian industry, between indigenous players and between themselves and foreign multinationals and expert service providers. Yet there are also those who being progressively-minded are already in the process of shaping themselves to meet the challenge.

It is a behaviour pattern that should be critically viewed and mimicked by all a sector participants.

Until very recently, most companies have been characteristically similar, in as much that endemic family / conglomerate control has been handed down from father to (typically) son, and that the firms were were themselves established at critical watersheds during the country's past: merchants in the colonial period, new industrialists during independence and technology appropriators in the early 1980s.

But the success of the 2000s has perhaps masked, now markedly juxtaposed by the global slowdown, may create the shifting of tectonic plates of commercial India.

Given the protected state of markets up until 1991 – though arguably realistically semi-protected ever since - the families, as the Indian elites, have understandably sought to maximise the returns on their original investment. Thus the well proven formula was to adopt licences, tooling and products (of all descriptions) from British, Germans and Japan sources, and ensure decades-long lifecycles. That ensured that original monetary layout was reduced, that cost relatively quickly amortised from output, requiring additional expenditure on tools and jigs on an adhoc basis, whilst enabling an absorption of increasing input costs and when necessary - as in times of economic slowdown. Critically the business model gave an great deal of 'business elasticity', able to maintain lower pricing during slump periods and boost profits during upturn periods.

As one would expect, it is a business model that few families and conglomerates wish to see quickly replaced, but not doing so endangers India of being left in the technological dark ages. Thus given the need to 'serve Mother India's population', 'integrate with the world at large' and 'produce profits' there has had to be a commercial balancing act, that accords more than most to the 'mixed economy' philosophy. India may on the surface see itself as the dynamic equivelent to China or the old US, but appearances are still somewhat deceptive, and there are very real differences between the 'Indian way' and elsewhere.

One such to date is the use of somewhat antiquated accounting procedures - seemingly closely linked with the British methods of the Victorian era - which has both positive and negative aspects.

They allow for a far greater roll-over of (ie retained) profits year after year, 'brought forward' to the next year's balance sheet. Effectively a liquidity-driven model. This then has the positive outcome of ensuring a firms stability, something that India and its families has long understandably held sacrosanct – and can be indeed be assisted by the BoDs choice to pay out a small stock dividend relative to overall EPS.

The more negative argument that may be stated is that such monies are not being used in the broader economic picture, thus not only viewed by investment bankers as 'dead funds', by viewed by economists as anti-circulatory, possibly holding back the economy and possibly raising the cost of capital for others. Moreover, whilst the accounting practices follow the same basic formula, the Indian currency practice of talking and reporting using 3 ways (Rupee, Lakh & Crore) adds complication when reviewing accounts, especially against international peers. This only really negated by those firms which are publicly listed on foreign bourses.

Thus India could be said by default or virtue to have created its own economic, corporate and reporting eco-system.

And as stated it is one that may well come under even greater pressure as the weak-spots of its economy and old-family firms become more visibly apparent.

India's necessary task in the automotive sector and elsewhere is to try and balance the firm's agenda to operate as an instrument of social good, whilst also avoiding the apparent complacency that even since 1991 could be said to exist, and obviously committed to ethical profit maximisation. Itmust look again at the speed and depth of its liberalisation programme, better align itself with international investor requirements; and possibly even create the basics of an economic template that can be exported to the west, one which aligns all stakeholder needs.

The size and mid-speed dynamic of the auto-sector (compared to slow evolution of agriculture or rapid evolution IT) means that it could feasibly play a role in developing that more holistically-minded economic model.

Good Luck India...अच्छे भाग्य






Post Script -

*
India's press reporting – as read from some executive comments - appears to suggest that Turkey is viewed as problematic to the Eurozone. Whilst the Turkish economy is viewed as 'overheating' and is heavily EU exposed via exports, as a non EU member with stronger structural economy (good capital markets plus lower wage climate) it should not be viewed by India as a similar positioned 'periphery country' to Greece, Italy, Spain or Portugal - as seems the case.

**
Though investment-auto-motives refuted the feasibility of “Indian Lightweighting” across the whole of the India auto-sector, so as to provide a national USP (ie “Radical Lightweighting”), it does promote efforts of 'technology trickle-down' whereby on a project by project basis, with convincing business case, conventional mass-manufacture steel vehicles incorporate 'assistive solutions' “Practical Lightweighting”. To this end, given the TATA ambition, investment-auto-motives expects to see TATA include such efforts, primarily to demonstrate its USP to the Indian public in passenger cars, esp versus Suzuki Maruti and foreign competition.

Micro Level Trends – Indian Autos (Part 2) – 2016 Planning: Remaining on Track After Exploring a Dead-End Road.

The previous web-log, in a very basic manner, reviewed the macro-level past and present conditions of the Indian automotive sector. The vehicle sales figures from 2000 to date demonstrated the metamorphosis that India has undergone. This thanks to a general mixture of: previous long-track global growth trend, the competitive advantage India leveraged in new-age and smokestack sectors, the opportunities generated for many enabling the rise of a 750m strong new middle class (of 1.21bn people), and the aspirational consumer dreams that have been created by a Bollywood with ever increasing western cultural exposure, which Indian companies seek to satisfy.


India's Grand Prix Event -

Whilst the story of modern Indian socio-economic progress is well entrenched and comprehensively reported, it was the long-awaited arrival of last weekend's inaugural F1 / Grand Prix race that many observers (both inside and external to) the auto-sector may view as highly symbolically, yet another important representation of India's increasingly powerful position on the world stage

Held in New Delhi, its final arrival was well over a decade 'late', this outcome resulting from the faltering hosting ambitions of various rival provinces (ie Kolkata, Mumbai, Bangalore, Chennai) many of which subsequently either altered their own economic planning templates, or necessarily did so from civil service central planning.. The successful candidate proving to be New Delhi.

The decade-long delay in the hosting of the event, may investment-auto-motives' theorises, may have been for very good reason. The late stage homologation of the Buddh International Circuit - only signed-off in early September (2 months before the race) – reflects a what could be viewed as a rushed intent to stage. If so why?

As explained in the previous web-blog, the global macro-headwinds of a contracting China, stagnant Eurozone and seemingly over-stated growth indicators in the USA, have created a new set of headwinds for India. Its export base suffering perhaps longer than previously anticipated, necessitating future national economic growth be self-generated; thus typical of the 2011-12 EM country scenario.


“Track Timing” -

It may well be the case that the Grand Prix was indeed timed to help overcome such headwinds, to act as a positive catalyst for not only New Delhi's local economy (gaining $170m or so and as part of the JP Sports City development) but the far broader Indian society and national commerce. F1 then encouraged and leveraged by central government to propagate national pride, enthuse broad society, coalesce different cultural factions and critically maintain consumer interests in the dream of new car ownership, and its related services. It was also planned to coincide with the Diwali festival which sees the highest level of consumer spend and most internal travel.

The Buddh track itself displayed upon advertising boards the names of high profile national companies such as Bajaj Auto (auto-manufacturing) , Airtel (telecoms) alongside international names like Pirelli (tyres) Allianz (insurance), DHL (logistics) and UBS (banking). Whilst the TATA logo sits on the flank of the Ferrari car and India's own 'Sahara Force India' team - owned by Vijay Mallya, Sahara India Pariwar & Dutchman Michiel Mol, run from its UK base – of course displays Mallya's own Kingfisher (brewing & airline) name. Interestingly the previous Indian sponsors of yesteryear such as ICICI (banking) and Reliance Industries (conglomerate) have been replaced by international brands, so demonstrating that whilst previously Force India was literally an 'advertising vehicle' for home brands to a global audience, it has now become a platform for those old and new internationally minded brands brands to re-enforce their Indian links.

The F1 event was then an important showcase: to a world-wide audience to highlight the country's geo-politically and culturally elevated standing, to its Indian citizens to demonstrate the internal dynamism of India and a 'can do' attitude, and with a sub-text relative to the broad national and internal ambitions of its automotive sector.


The Gradient Steepens -

The auto-sector faces recently availed structural challenges regards cost, quality and (labour) production flexibility, made all the more apparent by the juxtaposition of a global economic slow-down yet with a new set of EMs – the 'Next 11' – emerging as powerful attractors of industrial and commercial activity, FDI led and home-grown.

That is not to say India – nor any 'BRIC' – faces any immediate danger of economic meltdown or stagnation, the growth and investment fundamentals still extremely strong long-term. Simply that it is necessary for India - and counterparts – to recognise the international threat which has emerged and thus to evolve in response.

This inevitability was of course is was recognised in the country's 2006-16 AMP (Automotive Mission Plan) – as previously outlined - and so ongoing efforts were consequentially made in order to re-assess India's competitive position, alternative visionary possibilities and the competence of the sector's structural base.


“Visioneering” a Future Path -

In mid 2008 the Indian authorities approached America's MIT (the Massachusettes Institute of Technology) and set the question of identifying a route-way forward by which the Indian auto-sector could develop into the future, with ideally the ability to leverage a competitive advantage. MIT's Sloan Management School tasked two professors, Charlie Fine (Operations Mgmt & Supply Chain Strategy) and Richard Roth (Materials Technology Laboratory) to seek a tenable solution.


The MIT Routeway – “Light-weighting” India.

Here and now, given the recent running of the first ever Indian F1 race - which philosophically integrates the ideals of lightweight engineering - that route-way may appear at first glance all the more appealing. And indeed investment-auto-motives is indeed an advocate of reduced mass vehicles so improving fuel efficiency and typically production complexity and cost. And indeed it congratulates the likes of TATA Motor for capturing JLR's achievements in the use of advanced lightweight materials and in the long-run perhaps integrating such learning from premium vehicles toward mass market cars.

investment-auto-motives believes the route-way set-out by MIT to have been ultimately simplistic, highly theoretical, and very 'blue sky'; the professors' lectures showing it comprised of:

1. Recognising India's position as low-down on the market maturity 'S Curve' model, so still in its early development stages (as compared to N.America or Europe)

2. Identified broad 'Strategic Option' and the already 'owned' options by competitors:
- High Performance Cars – “tough because of Germans” (BMW, Audi, Mercedes) [plus British AML, McLaren, Ginetta, Noble etc & Italian Ferrari, Maserati & Japan's Subaru, Lexus]
- High Productivity - “hard to topple Toyota, Honda” [plus major achievements by Hyundai-Kia and Renault (ie Logan) and increasing JV projects on platform sharing]
- Low Cost - “how defensible is this?” (ie Next 11 EMs)
- High fuel economy - “high barriers given R&D levels for powertrain”

3. Thus leading to the consideration that:
- the “Lightweighting” - “field is still wide-open”

[NB This then immediately appears to echo the long-touted lightweight HyperCar ideology from Amory Luvins and the 'Rocky Mountain Institute' in the USA].

The following provides reply and comment to portions of the 'Lightweighting' theory, as explained by a Fine-Roth lecture and web-broadcast by MIT:

To requote Prof Charles Fine...”no-one has nailed this as a competitive advantage, it's still open”, which obviously begs the question why such an opportunity has gone uncaptured, such a business-technology space would be soon entered, then invaded. Prof Fine answers himself..“So, why aren't US companies doing this?”...."lack vision and will"...”[it will be] down to regulatory actions in CAFE fuel economy standards to drive change, [but I] doubt it very much”. Presumably due to his disbelief that Congress would be willing to de-stabalise the US auto-industry, no doubt the case, especially after the massive 'bail-out' of GM and Chrysler and the fact that GM stock prices still sit at $10 below their IPO launch level of $33 (as of midday Wednesday EST).

Thus the US context is made clear, and correctly so.

In contrast the India opportunity, as a very different PESTEL environment is presented:

Thesis A - “Vehicle Speeds Suit Lightweight”:
Prof Fine highlights the different driving and travelling environment, and sees a 'speed vs safety' regard that would support lightweight, less crash-resistant vehicles...”Indian roads are 'slow roads', the poor highway infrastructure prohibits 'high-speed' travel”....”it's not like US with fast [heavy/large] Chevy Suburbans crashing into each other...so the requirement is different...and can be populated by low mass lower speed vehicles doing less damage to each other...and so the crash requirement lower”.

Yes, the less developed Indian road infrastructure, with poorer road surface conditions and slower lawful road limits, notionally prohibits faster driving speeds. But the fact is that the regionally different speed limits are viewed with relative indifference by road users (The speed limits set to try and encompass the wide variety vehicle mix of scooters / tuk-tuks / cars / LCVs to HGVs – these becoming bigger and heavier). So nearly all drivers of all vehicle types commonly flout the speed limits, seen by road users as antiquated relative to modern vehicle capabilities and so too prescriptive and prohibitive. (Though greater road policing is being undertaken). Thus the different vehicle types tend to move at speeds relative to themselves in traffic conditions and weather conditions, with a typical self-regarding attitude of “fast as one can”. Thus on suburb and rural roads there will be a mix of slow scooters, medium speed trucks and faster motorcycles and cars.

These real-world conditions then do not match Prof Fine's theory of 'slow speed' environment, indeed, as in nature, the smaller vehicles 'buzz' round the larger heavier and slower. The need for high standards of crash protection then perhaps arguably greater in India because of its poor infrastructure (esp lane markation & utilisation and crash barriers) compared with better organised western roads that have very different vehicles travelling with far less difference in their respective speeds.

Thesis B - “Lightweighting is Future Orientated”:
The argument is made that historically trends regards fuel demand, fuel prices and fuel price volatility tends to 'trend up'. Prof Fine's self-stated “back of an envelope” guestimate is that fiscal savings of $24bn per year can be achieved by 2035 compared to the use of all-steel vehicles.

Undoubtedly, the appearance is that there is a 'trending-up', but an historical time-line is always an approximated average, one consisting of natural inflationary price pressures but critically also hiding the broader era-long phases of 'cheap gasoline' or 'expensive gasoline'. Those previously mentioned Chevy Suburbans and their large car ilk on US roads were only able to be 'fed' by a relatively recent era of 'cheap gasoline'. The US case is of course relative to its ability to influence its gasoline price via the supply-demand equation through trade, regional relations (ie OPEC etc) and previously war to ensure oil supply, now seemingly superceded by a 'soft-power' approach; but note how relatively short the 1973 oil crisis actually lasted.

India of course has historically had far less influence than the USA, but as its economic strength grows, and is seen to grow across the world, so too will its ability to influence its oil importation prices via trade negotiations. Furthermore India's own geographic position gives it closer proximity to major oil reserves to the west in the Arabic Peninsula, to the north west Pakistan & Iran and CIS states; this increasingly elastic supply chain then able to deliver the increasing import need.

[NB India's domestically sourced oil from off-shore rigs has been 'flat' between 700k-800k barrels per day between 1990-2009, compared to a much ramped-up importation demand over that period from 1,200k-2,900k barrels per day].

Thus, it appears that improvements created by greater globalisation – via a softening of old geo-ideological barriers – indicates that Indian oil supply and so its pricing could actually improve, any rise in future pump prices very probably a consequence of future government policy to raise taxation revenues.

Critically, the 2006-16 Automotive Mission Plan set out a template by which a major portion of India's future economic growth will be by forming ever greater commercial tentacles – upstream and downstream – with the oil industry.

These basic observations then undermines the “Fuel Future Orientation” argument set-out.

Thesis C - “Indian Industry is Still Young”
MIT's proposition here is that “Lightweighting” would be attractive to India's auto-sector because the industry is relatively 'young'. So, unlike a naturally resistive American, Japanese [S.Korean] or now Chinese which have heavy 'sunken costs' in conventional 'old' industry methods and models, India's manufacturers are not so entrenched and so have a choice.

It is true indeed, that in comparative terms India has not sunken as much investment into the steel unibody production system as have its western and eastern counterparts. But the very essence of India's domestically produced steel vehicles are closely correlated to an Indian engineering history intrinsically tied to steel through its steel based railway infracture in rails, locomotives and rolling stock, through its previous use of robust seemingly 'over-engineered' but ultimately 'fit for purpose' trucks and of course the intrinsic interdependence of its conglomerate groups which have supply chains and value systems that stretch from mining iron ore to iron processing to steel fabrication to steel structured vehicles.

Furthermore, much (though of course not all) of India's engineering education system at the student and undergraduate level especially has been historically formed by the past requisite knowledge of ferrous (and lesser extent non-ferrous) metals so massively influencing the knowledge-base of tomorrow's engineers and engineering managers.

But critically the whole of India's servicing and repair industry for the last 90 years has is based on steel vehicles, a sector which is now seemingly represented by the modern garages of city-centre car dealerships, but in great part is truly represented by back-street mechanics, sheet metal vehicle body workers and 'next-door' paint-sprayers.

Lastly, India though self-improving quickly, is (realistically) still reliant upon external multi-national VMs and their supply-chain (typically steel orientated) to introduce any powerful technical or quality advances. Advanced which can be quickly introduced in JV vehicles, or latterly transferred for use in fast-acting Indian brands so to gain USPs versus domestic competitors; this the case across all systems: body, powertrain, chassis, electronics and exterior-interior trim.

[NB Part of Ratan Tata's effort with Nano was to produce something 'Indian own', yet the basics of the car is still very conventional technology].

Hence, whilst India's car sector's actual growth spurt has been recent, and so appears 'young', the reality is that the sectors history is entwined with that of the country's deeply engrained steel production, vehicle fabrication and vehicle repair past. Those apparent last 10 years stretch back over a century.

Thesis D - India as “Last Great Virgin Market”:
Prof. Fine describes India's future opportunity with the phrase the “last great virgin market”, something which indeed appears the case when the vehicle ownership statistics from various bodies reveal that only about 5% of households own a 4-wheeled vehicle, roughly equating to about 10 in 1000 people inside a country with a population of 1.21 billion.

Of course a sizeable proportion of that population will be non-adults or aged, so outside of the earnings and ownership bracket, but Fine stipulates that (to paraphrase) “from a global perspective there is no other region as large and as relatively homogeneous”.

That level of homogenity may be debatable given the cultural 'mosaic' that exists, ranging across religions (though primarily Hindu also including Muslim, Sikh, Jain, etc) with in addition the still very prevalent (though very slowly dissappearing) caste system of social hierachy.

Nevertheless, the phrase Prof Fine used was indeed apt, since the above mentioned very low vehicle saturation figures speak for themselves,

But of course vehicle ownership and use patterns rely heavily on people becoming more economically engaged which itself depends upon the ability of the Indian government to both generate a more powerful economic model for the country at large and ensure that the wealth created does indeed pass down throughout the broad populace.

This issue is viewed in more detail below under the heading 'Assessing the Potential'.

Thesis E - “Exportability”
The Automotive Mission Plan regards export ambition is addressed here, and it is stated that specifically “Lightweighted” vehicle designs would appeal as export propositions to foreign countries' consumers; presumably given the trend to eco-consciousness and reduced 'carbon footprints'.

Prof Fine says that India will not stay a low-wage auto-build environment and so must climb the value ladder, hence the idea of specifically built lightweight vehicles holds promise. The premis being that a new idealism of self-design and self-manufacture by Indian players will allow them to capture new innovations via improved self-R&D activities. The outcome scenario would be IPR-backed product innovation directly deployed on Indian roads, and thus attracting export sales to countries that wish to mimic the 'Indian leap', and provide the potential for IPR/build licensing agreements.

investment-auto-motives believes that the general high-brow global eco-philosophy does indeed 'read the zeitgeist', especially pertinent to the previous and ongoing moulding of social mindsets in notionally 'advanced' post-industrial countries. And so perceptually at a surface level the thesis appears to have substance.

However, though India's low-wage economy, well suited to labour intensive assembly, has indeed been pressurised with high inflation levels, the general global deflationary environment – which India is forced to follow – will temper much of the threat to India remaining in parts a low wage economy.

Secondly, to date it is well established that alternative build types such as lightweight engineered vehicles do in fact require far greater levels of manual labour in their construction, as well demonstrated in the specialist sportscar or specialist utility vehicle fields.

This a consequence of the typical business plan which bounded by know or estimated order numbers (usually limited) so devises the appropriate alternative product construction solution, materials type, bought-in component schedule, BOM (Bill of Materials), labour content and overheads absorption. However, it should be noted that even since WW2 and the proliferation of new materials and methods adopted and advanced (ie fibreglass, to SMC plastics to carbon-fibre) unless a company simply churns-out a standard product (which is rare) the ability of even the best known auto-engineering firms to accurately business model is questionable, this opaqueness the case since each product in this field - sportscar or tailored utility vehicle - tends to be insular, later product types typically enhancing new new construction and materials advances to improve performance and so upsetting the accuracy of the business modelling capability.

However, whilst this is the general norm, cases of progress have undoubtedly been made on a proprietary basis at: VW-Audi-Lamborghini, Porsche, BMW, Mercedes-Benz (McLaren-Mercedes), Ferrari, Pagani Aston Martin Lagonda and seemingly more recently McLaren Automotive (details below).


Thus paradoxically, only a maintained low-wage environment could indeed be helpful to the MIT ideal of the “Lightwieghting” revolution. But given the size of ultimate demand levels for vehicles in private, commercial and governmental spheres, the thought that such demand could be effectively met by multiplying and scaling-up the niche vehicle model to include many many more assembly workers would appear to capital markets as little more than a India-wide job creation scheme, akin to the civil service, rail-network or ship dismantling, employment protected but from an investment perspective value destrucutive

The idealised outcome of simultaneously or consecutively creating India as the new-age physical demonstrator for “Lightweighting” so attracting export sales to those countries that wish to mimic the 'Indian leap' and therefore provide potential for IPR licensing agreements, once again appears flawed. Any other country seeking to replicate would very probably seek to develop their own lightweight vehicle design and production capabilities, possibly using a western engineering firm to create the basic template for each vehicle type, then themselves nationally build latter development capabilities. It would make little sense in their own economic planning to move from reliance upon the western steel unibody model to that of an 'alternative' Indian lightweight model.

And lastly, the previous belief that business models and tenable long-term income streams can be obtained from IPR licensing appears to be waning. The advanced and disruptive nature of advanced IPR in mature industries (esp autos) looks to create very real hurdles, which are increasingly hard to overcome in a growing climate of national and corporate self-sufficiency. Investment-auto-motives previously reviewed such a company – Torotrak in the UK – and the experience of that firm's income seemed to rely upon a mix of commissioned advanced engineering projects and governmnet funded eco-engineering initiatives; its own IPR licensing model failing to attain the potential first thought (itself possibly promoted by Silicon Valley hi-tech influenced investment bankers).

Thesis F: “The Semi-Conductor Industry Parallel”

It is suggested, with indeed good reason, that any transformational change of 'vehicle DNA' would need to be undertaken at an industry-wide level as opposed to company specific level. The obvious reasoning for this being that all players then move technically forward together, able to mutually develop and share resources and breakthroughs.

Critically, any technology leap is blocked by the already in situ supplier base, which to a similar or greater extent, has 'sunk costs', future investment interests and core knowledge in its specialist field. To quote and paraphrase Prof Fine “no single firm can make the supply chain change...too risky [an] investment for one...[thus] one 'road-map' for all means all must undertake the journey”

Prof Fine uses the case study of the US Semi-Conductor industry in the 1970s whereby the very real external threat then coming from Japan, and later S.Korea, urged the sector's players to abandon their go it alone strategies and acting as a consortium (though not legally presented as such) changed the R&D roadmap to put them a generation ahead.

To once again paraphrase: “Between 1970-1990 there was a reversal of fortunes between US and Japanese firms in chips and production technologies, the US created a consortium called "Semi-Tech" since the technology was seen as [core to] national security...so government circumvented anti-trust laws to allow co-operation, collaboration via a new roadmap...which then allowed for supply chain co-ordination. It led to rolling 10-year road-maps which became ITRS at global level, So very much a case of “if we built it they will come” like the film 'Field of Dreams'”

It is noted that the for the Indian auto industry to similarly change course requires scale and "all-in" involvement, recognising that today's R&D and CapEx knowledge is very much biased to steel given its 100+ year history, Thus naturally “Lightweighting” R&D would cost more than that for 'turn the handle' steel vehicles.

He suggests that those R&D costs would be (eventually) repaid by the 'lifecycle costs' per vehicle type, hence upfront R&D expenditure would be recouped by through-life fuel cost savings. Yet he acknowledges that these are very different parties, the manufacturer (and often supplier who may share R&D costs) versus the private car buyer or business owner or fleet operator. The question remains “who capatilises up front?”, and cites that “the government may need to 'step-up'” along with “firms should justify it too”. “It's not for the faint hearted, requiring an industry roadmap, technological roadmap, supply-chain roadmap, business model roadmap, regulatory roadmap”...”all to build consensus and form collaborative R&D”. It is suggested “that all players would then compete in the broad product market, not 'sectioned' market as is today”.

Prof Fine indeed recognises the very severe set of challenges that would lay ahead in embarking on such a mission, but with overt optimism believes it possible given the 'Semi-Tech' story. A more pragmatic investment-auto-motives believes that the highly engrained history, knowledge and methods of the Indian auto-sector is in reality little different to that of the US sector, indeed possibly more so given the far more limited financial resources the main players can utilise.

The difference is that while equally or more entrenched, India does indeed sit at the bottom of the market maturity s-curve, thus is in a prime position to simply re-run the US model over coming decades, perhaps seeing itself presently mirroring the US in the late 1920s, early 1930s, for the Model T read the Maruti 800, and the model variety now seen and exemplified by Maruti-Suzuki's broad portfolio, indicative of the differentiation strategy undertaken by GM.

Realistically there are not enough real-world parallels to convincingly compare the US semi-conductor industry of yesteryear with today's Indian auto-industry, so it is a spurious parallel, even if noted as a great success story.

As for the off-setting of up-front higher R&D costs repaid by the 'lifecycle' cost-savings per vehicle, the fact is that it is unlikely that the new vehicle purchaser would hold onto the vehicle long enough to recoup the higher price that must be paid (given R&D cost amortisation per unit).The fact that a vehicle's typical 10-15year life may be spread across 3,4 or 5 different owners massively complicates the 'lifetime pay back' scenario.

The Indian government, or a specific region, could well be enticed to “step-up'” and fund the R&D work required. But it must also be remembered that – as a closer case study - many regions decided to fall out of the race to support the escalating costs of the new India GP Race Track itself, the transformational face of India. Many regions might feel the “Lightweighting” initiative to be similar, critically bound to fund an essentially unknown quantity, with probable recurrent calls for funding (ie “how long is a piece of string”).

As for the suggestion that “all players would then compete in the broad product market, not sectioned market as is today”; this is highly debatable since without true alteration of the marketplace all that would be seen is that 'plastic vehicles supplant steel vehicles' the sectioned market-place seen today still very apparent.

Thus, as alluded to, the proposed technology switch to lightweight materials is anything but a panacea for structural market reform.


The Materials Perspective -

Prof Roth, of MIT's Materials Tech Lab provided a basic overview of applicable lightweight materials options that would theoretically underpin such a new technology routemap. Citing the obvious options of Metals vs Composites.

Within the Metals group the options of:
- High-Strength (ie more lightweight) Steels
- Aluminium (alloys)
- Magnesium (alloys).

Within the Composites group the options of:
- Fibreglass
- Sheet Moulded Compound (SMC)
- Carbon Fibre

Prof Roth Stating the well known edict that the materials are typically viewed as a matrix of options. This relative to performance requirements, level of project investment finance available and competitor actions etc. This usually applied to specific vehicle parts: structural BIW, closures, and chassis / suspension on a case by case nature, and typically feasible in small batch operations, not feasible or not proven so in mass manufacture; given that the present mass production infrastructure is dedicated to steel based vehicles.

[NB However, one must remember (as stated above) the proprietary advances made by VW-Audi, Aston Martin Lagonda, Jaguar Land Rover and McLaren. Ferrari's efforts (trickling to Maserati) should not be overlooked, though its design approach appears more model specific].

The main challenges that advanced materials pose are:

- the procurement & processing routes of each material.
- the positive & negative behavioural properties of each material
- the finishing methods required
- the assembly planning required for each material-specific vehicle subsystem

Specialist materials tend to be mined / extracted from rarer locations and typically more remote locations, the supply route of the raw material more easily disrupted and with that pricing volatility, as such they are less generally traded and thus available. Of the materials listed, magnesium typically has an insufficient supply to meet present demands.

As regards processing, China is seemingly ahead with magnesium through development of the Pidgeon process method., but presently not reached automotive-grade standards. As for aluminium sheet (a speciality alloy) requires highly tailored properties and must be made in large quantities, with no facilities in India (or indeed the the USA). As for composites, even the theoretically large market potential in China has not yet provided a convincing case, its high sourcing costs unable to be off-set by the low-cost labour advantage

As for the ideal of carbon fibre, investments levels are so high and scale requirement so large that no-one has of yet sought to conquer the issue, which ultimately is the usual 'chicken and egg' dilemma between demand and supply

[NB BMW appears furthest down this 'dark road' having used carbon fibre as a roof material for an M3 variant, and presently researching the feasibility of creating carbon fibre substructure shells for the i3 concept vehicle, which it seeks to assemble on a standard production line].

This highlights the big quandry about advanced materials: given the impracticability of 'mass-niche production', then how to ensure that lightweight structures and components can be assimilated to standard mass production methods of running assembly line and JIT (Just-In-Time) parts delivery.

Ultimately challenges abound regards constant availability of raw materials, the manner in which any materials require painting, that affect upon assembly procedure and so the manner in which infrastructure and so capacity is altered. As regards perceived product quality, one important issue is the challenge to attain a similar high quality A-surface finish to steel & paint on a vehicle exterior.

The challenges are viewed as a “learning issue” by Prof Roth, given that steel is so well understood after 100 years of use.

However, unsurprisingly the big picture analysis demonstrates that whilst the positive results of that “lightweighting” notion can be partially achieved through the use of High-Strength Steels at small marginal additional costs, the real leap forward is only available through sophisticated metals and plastics.

These though are viewed as innately troublesome at most stages of the supply and assembly chain (ie volatile in availability and price through the value-chain).

Prof Roth mentions that the 'advanced materials story' has been around a long time, with little action resulting from initiatives such as USCAR and US AMP. He also notes that the US has had “bad plastics experiences”, which positively for India it has not experienced, at least on a similar scale, and he notes that the national fleet mix in India appears more amenable to switch to plastics. And feels that the supply chain would be theoretically more 'open'; theoretically yes but as for practicality, probably only on a project by project basis.

But as one may well deduce, the present steel-based eco-system of the automotive sector ione that has far greater inherent supply and pricing stability. These two elements are crucial to its efficient and smooth operation.


Proprietry “Lightweighting” Technologies -

Thus on a mass manufacturing level the headwinds facing advanced materials suggest that there is a long way to go before each and every negative aspect can be overcome, so as to be suitable for large scale production.

Whilst “Lightweighting” may appear an eco-panacea for the planet itself, if designed and produced en mass, the ability for actual implementation looks to remain remote on anything except low and mid volume vehicles.

So as a truly 'disruptive technology' to mass produced vehicles the chances look bleak, but that is not to say India cannot continue learning through private company and publicly funded R&D about lightweight technology applications.

An indeed this is exactly the route taken by TATA as part of its strategic take-over of Jaguar Land Rover. Although it had good learning of mass produced steel vehicles with its own small car range, it nevertheless recognised that Maruti-Suzuki had greater experience of steel mass manufacturer and so might well parallel its competitor's capabilities, but would be hard pressed to surpass it. Also seeing the need to climb the value-ladder JLR's acquisition has undoubtedly been a source of important 'alternative structures' internal learning, with it is suggested even the new Land Rover assembly plant in Pune offering production engineering learning for steel based vehicles.

However, as mentioned above with case examples, unsurprisingly the advances in “Lightweighting” have been undertaken by well established marques recognised for their sporting performance lineage. They operating in typically a very competitive arena – especially amongst the Germans, British and Italians – where R&D, race-circuit success and associated sales success are indeterminably inter-linked; an arena whence functionality underlies symbolism.

Thus unlike the MIT scenario-gazing, actual engineering advances have come at the proprietry technology level, pushed by the ethos of seeking competitive advantage. As with the technical advances made in war-time or to stay ahead militaristically in peace-time (typically exploited by corporates thereafter) there appears at a sociological level a need for necessary climate of 'animal spirits' shared amongst a close-knit team. It is doubtful such an environment would be created by a 'democratised', largely Indian government-led initiative.

Proprietry development, ownership and reward appears the most market and capital efficient route-way, thus leaving the decision in the hands of specific Indian manufacturers, if they indeed feel it would be of competitive assistance; which presently and into the mid-term it seems not.


The 'Oil Economy' Paradox -

Stand back from the everyday societal rhetoric, and the 'big picture' view presents a paradox for BRIC countries, the 'Next 11' and India in particular.

For political reasons EM countries are necessarily having to nod along in agreement with the US and Europe about the dangers of apparent climate change, and the resultant need to develop eco-friendly products. But the leaders of those EMs know all too well that their best chance for socio-econiomic development, to bring people out of poverty and raise general living standards, relies heavily on the much maligned 'oil economy'.

This is stated in India's Automotive Mission Plan as a necessary step to ensure timely expansion of its economic growth.

Yet whilst that may seem doom and gloom, the irony is that the products of Indian auto-sector – themselves often born from previous austere times in Europe – might well serve as part of the answer to seeming global climate change.

Just as tuk-tuk 3-wheeler and mini-CVs have been exported across SE Asia, into the Middle East and across CIS, there is now good reason for their re-entry into Europe (S. Europe espcially given Brussel's and IMF's austerity packages) and even entry into major cities in the USA. With Euro5/6 compliant engines the tuk-tuk could indeed become the new-era small CVs and even taxis in Madrid, Barcelona, Rome, Milan, Athens, and even New York, Seattle, Portland and other cycling-centric cities.

Thus just as India has much to learn from western VMs and specialist engineering developers, it may well be able to philosophically and physically export a “Less is More” ethos to the west using what is ostensibly old era technology and products.


The Powerful Anti-Thesis Argument to “Mass Lightweighting”-

The 'replies' by investment-auto-motives to Prof Fine & Prof Roth serve to critically highlight that many of the thesis proposed have fundamental flaws in either their initial assertion or the picture build around them:

Thesis A: “Vehicle Speeds Suit Lightweight” - No. An unfounded perception.
Thesis B: “Future Orientated” - No. Oil supplies appear strong as India grows
Thesis C: “India Industry Still Young” - No. An unfounded perception.
Thesis D: “Last Great Virgin Market” - Yes. But also highly complex
Thesis E: “Exportability” - No. Viewed to be highly doubtful.
Thesis F: “The Semi-Conductor Industry Parallel” - no. The parallel does not 'fit'.

Moreover, we have seen how technical advances, when actually deemed necessary and not simply 'nice to have' tend to bear fruit under proprietary conditions. India's vehicle producers and their engineering and manufacturing functions are plainly not under such intense pressures, and critically would best serve the country at large and themselves by following the 20th century auto-sector development route, improving vehicle safety, comfort, speed and ultimately desirablity from the exploitation of the steel unibody (monocoque) principle.


Sound Hypothesising (Thesis + Anti-Thesis) -

Whilst, as described, the “Lightweighting” idea should not be wholly dismissed, it must be practically integrated into the realism of today, the immediate future and mid-term (ie to 2025), thus as and when appropriate to corporate competitive advantage, vehicle type and effect on overall vehicle sector.

The MIT suggestion looks fundamentally flawed given the realities of the Indian case at the macro PESTEL level and micro industry level; resulting from an over simplified, broad-brush academic approach; one heavily reliant upon theory (indeed over-theorised) and poorly suited external case studies.

[NB However, MIT's investigation may have been politically expedient at the time given the need to support TATA's fiscally stretched purchase of JLR]

So, whilst 'food for thought' the direct inapplicability (so 'emptiness') the recommendation then leaves the Indian authorities with no feasible alternative route-way.

Thus investment-auto-motives poses the question, “is such a radical re-formation of the very fundamental design and production 'mechanicals' of the sector actually required ?”

India views China, Brazil and Russia as its prime auto-manufacturing foes – all to date using the same high-volume pressed-steel unibody and chassis-body manufacturing model; a model devised by the Budd Manufacturing Co in 1930s America, long the global industry standard, its scale suited to large consumer populations and export ambitions.

Instead then, Indian authorities should seek a better 'Thesis + Anti-Thesis' formula than that offered by MIT, to arrive at a more convincing conclusion with accompanying recommendations about the future of India's vehicle sector.


A Macro Study For Ongoing Liberalisation -

There seems a need for far greater focus on the more macro aspects of the Indian Marketplace and the Auto-Players therein; as opposed to vehicle construction methods, the vehicle types themselves or indeed the mix of those vehicles.

It appears to investment-auto-motives that since India has come from a very low personal wealth base (and arguably similar for business) that those vehicles that populate the country have been devised to very well suit its general and specific purposes.

Whilst western markets saw a 'perversion' of vehicle use – more symbolic than necessarily practical (especially witnessed by America's love affair with the truck-based SUV, and Europe's ongoing affectation for personal coupe-cabriolets) – India, though similarly seeking SUV symbolism in the new upper-middle classes, is for the most part a nation who's vehicle closely match their use. This then no doubt provides what the west would see as remarkably small 'carbon foot-prints', the scooter, moped, motor-cycle and tuk-tuk providing remarkable transport efficiency by western standards.

Thus it is not the vehicles themselves that need 'visioneering' but the structure of the national champion VMs, the down-stream suppliers and up-stream retailers and the (as noted by theAMP paper) the potential for growth complimentary to the auto-sector, and investment-auto-motives suspects for growth by structurally re-configuring the major players and by further liberating all sections of the 2-wheeler, 3-wheeler and 4-wheeler market places.

It is this separate arena that must be 'visioneered' so as to increase industrial efficiency and continue to improve consumer choice.

This has been undertaken to a great extent by the periodic creation of JVs between national players and Japanese and European multinationals, and this encouragingly does indeed allow for the improvement of indigenous vehicles.

But the vehicle market itself is still largely governed by domestic players which have developed and now 'own' or 'share' their respective segments:

Mahindra – 4x4 (Jeep) and latterly SUVs
TATA Motor – Trucks, later cars and latterly SUVs
Maruti-Suzuki – small & compact cars and laterly small SUVs
Hindustan Motor - iconic Ambassador model & Mitsubishi products
Bajaj Auto – 2-wheelers, 3-wheelers and expected low-cost small car
Force Motors – tractors, mini-trucks, LCVs, Vans, Trucks and latterly SUVs

[NB investment-auto-motives suspects that with an increasingly wealthy Indian elite, there may be a chance that Force Motor (in present or future guise) may seek to link with the similarly named Formula One team (based in the UK) to create the first Indian Supercar.

Thus seeking to take Indian ownership of the presently relatively small supercar segment, so mimicking the race-road interlinks created by Ferrari & McLaren; very possibly using the Buddh Race Circuit to operate a similar 'own and run' facility for exclusive vehice owners, based on the Ferrari FXX template. This necessary given the poor condition of Indian roads, and the traffic dangers in urban areas where good roads exist]

However, whilst such far-off plans may well be in long-term thinking in certain corners, it is obviously the mid and long-term potential (in breadth and depth) of the mainstream segments that the likes of the Mahindra family, Ratan Tata & Ravo Kant, the Bajaj family and the Firodia family wish to determine.


Assessing the Potential -

A very recent study by Rajesh Shukla, Anuj Das & Charu Jain of the National Council of Applied Economic Research looks at the question of Indian car ownership potential and arrived at what appear basic (common sense) yet important conclusions about the past demographic pattern of new car buyers.

The NCAER's results showed:

- 5% of households have a 4-wheeled vehicle vs 32% with 2-wheeler
- average HHD income was R198,966 vs R83,184
- regular savings pattern was 38% vs 33%
- (non-agricultural) self-employment was 37% vs 24%
- (agricultural) self-employment was 17% vs 29%
- literacy rates of 0% vs 1%
- education to 'higher secondary' 31% vs 60%
- education to 'graduation +' level 66% vs 37%

- of 9.5 million car owning households, 6 million (65%) are in urban areas,

The characteristics of these urban car owners:

- around 90 per cent of them belong to higher income classes (4th and 5th quintiles).
- average annual household income is Rs. 206,556, average expenditure is Rs. 108,664
* (so saving nearly 50% of income for health, education etc)
- although average household size is 5 but average number of earners is just 1.4
* (which abolishes the old general belief that bigger family households adds to more income)
- about 66 per cent of car owning households also own a two-wheeler.
- the car purchase decision in Indian urban families is influenced by the head of the household followed by the chief earner, female members contribute just 14 per cent in making such decisions.
- The durable ['brown & white' goods] ownership patterns show: TV at 93%, refrigerator at 90%, mobile phone at 82%, washing machine at 66%, motorcycle at 51%, scooter at 21%, credit cards at 19%.

The results then concur with typical expectation regards income levels, propensity / ability to save, type of employment and education levels. But critically the NCAER also noted other 'common sense' aspects. To re-quote the conclusions:

...”Results show that while income has great influence on demand, it is the expenditure pattern that really determines the likelihood of purchase of major consumer durables, including car, by a household. The increase in annual expenditure by Rs. One lakh reflects the increase in status of a household in terms of both financial and social aspects and hence increases the chances of a household to go for a car (still considered as a status symbol)”.

So, as has historically been the case, whilst there is an undoubted link between earnings and car ownership, the sociologically engrained need to 'save for a rainy day' plays a major part in purchase decision-making: timing of purchase, ability to negotiate a good price, other family commitments etc.

...”Secondly, the major source of household income also plays an important role in creating possibility of car purchase by a household. This is what our result shows. It clearly shows that those households with business as major source of income have greater chance of purchasing a car in comparison to households with salary as major source of income”.

...”Lastly, the product ownership (white goods) of a household also, to a great extent, determines the car purchase likelihood. Those households with presently owning at least colour television, refrigerator, motorcycle, cellular phone and credit card have greater chances of purchasing a car in near future. The reason is that these households already own all the major white goods; so, their next priority could be a status item like car”.
Importantly whilst India could indeed be said to be a young car country, given the growth explosion over the last decade, the very notion, idea and ideal of the car is unsurprisingly deeply engrained, that level of conditioning only exacerbated by western TV and cinema images so further crystallising the expected DNA of a car.
[NB this fact was of concern to investment-auto-motives when the TATA Nano appeared, since though priced as affordable to a whole new (previously 2-wheeler) demographic, the cars small wheels and rear engine did not conform to the norm, even if it be a superb product].


Global VM 'Entwinement' -

In order to fulfil that consumer expectation, instead of India going its own way with a radical step-change in vehicle engineering, it may very well will need to become ever more entwined with leading foreign VMs.

This need not be the 'one-way street' of multinational VM dominance as is so often thought inevitable. History shows that India is very well practiced in absorbing foreign industrial learning, the 1983 founding of Maruti Udyog (Suzuki Maruti) later becoming Maruti-Suzuki, which though still majority owned by Japan's Suzuki (54.5%) reflected a change in ownership structure from government to institutional shareholders. Suzuki benefited from its advantage of its advantage in the vehicle sales during the early phase, whilst India seized the opportunity to create a then all new car company with international standards, thus a benchmark and catalysts for India Inc. to transform the internal practices of its auto-sector. More recently it gained greater benefits from the swap of majority as the marketplace boomed.

A different model exits with TATA Motor and FIAT SpA, where TATA's large dealer network and website portal provided FIAT with an easier entry into India than entering solo, and benefits from a powerful sales channel to access new customer groups. The recent 'threat' by FIAT's CEO Marchione highlights the desire to uncouple itself from Italian semi-dependency and re-create its Brazilian success in India, could provide TATA with greater leverage in its somewhat strained relationship with FIAT, as to transfer capacity from Italy to India would add volume at the Ranjangaon plant near Pune, and notionally see much improved margins and profitability for the JV from FIAT's Palio, Grande Punto & Linea models. This an other actions providing additional direct learning for TATA regards Euro-Brazilian quality levels

In late 2009 Bajaj Auto sought to ride the PR wave for TATA Nano by stating that, in conjuction with Renault-Nissan, it too would create a new Indian low-cost car, pitched at $2,500 and released in 2012. That project was reported as abandoned 4 months ago, partly no doubt due to the Nano's like warm sales figures, which may have been underlying tensions between the JV partners, aswell as Renault's working with Mahindra. Yet Bajaj whilst successful with 2 & 3 wheelers may see the continued strategic need to develop a car so as to not loose future sales as people switch from bikes and trikes to small vehicles. Thus it is assumed that the company's strategic intent is to still follow the car path and so requiring a new global VM to assist in a major portion of the development work. That could envelope other small car makers such as PSA Group, Daimler's Smart division, VW Group (Up model) etc.

Mahindra & Mahindra previously created a JV with Renault to market the Dacia Logan in India, now known as the Mahindra Verito, providing the M&M brand with a plausible entry into the passenger car sector, and so expanding its portfolio. Sales expectations however were not reached, recording only 60k units in its first 5 years. The adapted new model (Verito) is said to be better suited for India, but there is a possibility that Mahindra saw Dacia's Duster cross-over model as a threat to Mahindra's own compact SUV the XUV500, and so possibly sought to avoid a clash of mutual competitors. This will have been recognised by Renault.

Hindustan Motor is renowned for its iconic Ambassador model, based on the 1956 Morris Oxford it has served India in various guises from sedan to taxi to pick-up for generations. Aswell as new model sales which have declined heavily the company provides parts and service operations for the still large India wide fleet. However, the cars decline has been seen and is inevitable, recognising this the company sought various collaborative agreements with foreign VMs, ending with an assembly and sales channel agreement with Japan's Mitsubishi Motor. The only vehicles now displaying the Hindustan badge are Ambassador, Veer ( Ambassador pick-up variant) and Winner, a self-developed mini-LCV. It however markets a number of Mitsubishi vehicles including: Lancer, Lancer Evo, Cedia Sports, Montero, Outlander & Pajero SFX. Hindustan's parent, the Birla Technical Services Group will need to consider its future strategic position and a possible method for remaining in the car sector, something it might come under government pressure to do, so as to keep an Indian brand active. This could provide a fresh start possibility with an ambition to re-run the Suzuki-Maruti model.

Force Motor has has a foothold in utility vehicles and adapted previous generation SUVs for some time. Like Bajaj Auto, if its chose to pursue the car market, it would probably have to do so by piggy-backing another foreign VM and re-branding the vehicles. However, given its sales base it is not a front-runner a multinational VM's JV partner. However, its freedom is that it might be able to pick and choose products from a plethera of other providers on an 'systemised ad hoc' basis. Possibly creating a partnership with another smaller Indian brand to convincingly access other VMs product ranges.

Premier Motor currently sells a re-badged Kia Sportage, and appears a much smaller entity in car market participation than during its former 1960s years as a partner with FIAT. Premier then like Force Motor sits on the fringes of the market, and so could see itself as teaming up with another Indian brand to similarly access alternative products fro elsewhere.


Conclusion -

The global threats that have appeared on the Indian horizon in the form of the 'Next 11' EM countries are indeed of growing concern, especially so their ability to replicate the standard steel-based automotive manufacturing system, just as India has done.

And indeed, relative to the competencies any of those 'Next 11' evolve, some quarters of the Indian auto-sector may indeed come under attack. But this very probably set to be regards either independent low-value component manufacture as is typically the case, or through creation of a small scale vehicle specific economic eco-system, usually in utility vehicles for domestic and regional use first, then years later with often unachievable international export ambition.

However, whilst an undoubted threat, such countries typically don't pose a major immediate or mid-term threat, so any industry reaction should be measured and proportionate relative to the actual – not loosely perceived – threat.

As such, the MIT proposal for “Indian Lightweighting” should be allotted its correct position in the grand scheme of things. This means that it cannot serve as a template for complete re-orientation or re-configuration of the auto-sector's historic and present 'centre of industrial gravity'; to do removes India from the global industrial and consumer standard.

Instead any “Drastic Lightweighting” idea should be used as a 'high-concept' philosophy for the far horizon, and placed into a category which serves the 'hi-design' school of thought that stretches from automotive design & engineering colleges across to niche manufacturers offering bespoke or near-bespoke low-volume vehicles for specialist customer groups. However, the notion of “Practical Lightweighting” within the realms of industry standard practice, should become ever more prevalent as a necessary function of vehicle design & engineering, the ethos and practical solutions seen on the TATA Nano then providing inspiration industry-wide.

[NB Unfortunately, the MIT idea of India pursuing an initially domestically directed, radically different, vehicle set has overtones of the AFRICAR ambition seen in the late 1970s and early 1980s. An 'Indigenous Africa' low-cost lightweight vehicle, using the most high-minded design principles and simple locally available parts, flailed dismally in the face of Africa's transition from conventional French vehicles (ie Peugeot 404/5 pick-up) to conventional Japanese vehicles (ie Toyota LandCruiser & Hi-Lux)

Equally, history also shows how Turkey twice tried to develop its own (lightweight) national vehicle – the Devrim and Anadol - but the strength of competition from conventionally engineered, high volume vehicles, and the issue of Turkish-American political relations (GM & Ford) scuppered the initiative].

Thus, the conventional all-steel (or largely steel) manufacturing model then looks set to stay so as to fulfil both increasingly high consumer expectations (esp in crash safety and noise,vibration, harshness), aswell as auto-sector business model norms. This is not to say there cannot be broad variation in vehicle design methods, including greater use of composites, simply that such applications must be very well considered

But it must be remembered that India is a country of 1.21 people, its labour force participating in what historically has been, and still largely is, a highly regulated, semi-protected national economy.

The country is of course a product of its 'mosaic' culture and complex history, so although seemingly united as 'India Inc' is in fact far more layered and nuanced across politics, economics, commerce and general society than is initially obvious. A result of past Feudal rule, British Colonialism, Raj rule, declined British hold, 1947-91 Socialist tendencies and post 1991 a welcome but often seeming 'dragged' regulatory liberalisation of commerce because of the need to balance critical stable employment versus national growth.

Thus the country is necessarily a slow economic actor on what seems a fast paced, tumultuous global economic stage – especially so presently. Much of this beyond safe-guarding the social stability interest through maintained employment, is the understandable ideal held by India's elite that the Indian future should be its very own, determined by Indians for Indians. To this end that political and business elite appear to want to merge the best of those economic systems that the country has experienced, so balancing social stability and growth issues whilst maintaining a string country-wide organisational system – the conglomerate replacing that of the yesteryear bureaucracy.

Given the central importance of stability it seems inconceivable that India could or should be led down a path of radical re-orientation regards the future of its auto-sector.

Thus instead of “Lightweighting” or some such, India is effectively destined to maintain the steel-body mass manufacturing methods that served it so well in the past and do today. To follow a seperate path to the rest of the world would be foolhardy, for its own economy and the investment potential the country still offers.


Thus like other geographically large EM countries with major populations, India will benefit most by re-running the historically proven western economic model; a model that indisputably raised the living standards of hundreds of millions, now able to replay for billions across Asia.

That model in turn will offer investment and reward potential for institutional investors, PE investors and private retail investors. With importantly, the future seeing the Indian citizen more likely to become self-engaged in the system itself as a consequence of improved educution in formal and governmental realms, aswell as far more self-learning than was perhaps the case in Europe or sections of the USA in the 20th century.

The Indian people then, like their own conglomerate corporations, will very probably absorb the best lessons from the western past to create their own very Global-Indian future. Similar liberalisation will in time be seen across the Indian auto-sector.

In the meantime, India will continue to require robust, relatively low-cost vehicles, with proven steel chassis and monocoque construction methods that make them fit for purpose, and increasing comfortable and safe. It seems inevitable that the market will continue to remain protected as its own VMs court foreign manufacturers for learning, and conglomerates maintain their own or affilaited deep supply-chains in conventional steel technology.

India's business elite – like China previously – well recognises that it holds the cards regards foreign VM's growth ambitions, hence it appears to operate a 'treat them mean' attitude. This stems from historical interaction and a more combatitive business theology the west typically brings to the table. But if western VMs are to prosper in India they must adopt a more long-term symbiotic approach, as undertaken by the Japanese.

In the niche mould, the past has witnessed entrepreneurial auto-manufacturing efforts which sought to capture opportunity from the country's wealth expansion and emergence of the new lifestyle-led new middle class. That 'lifestyle' is simultaneously embodied and created by Bollywood's modern-era story-telling, which inter-mixes plots of youthful care-free city-scape and international adventure with the intrinsic Indian 'village' value-system of family, morals etc.

Precisely that 'Bollywood interplay' of 'personal freedom' governed by 'self-reliance' and bounded by 'cultural cohesion' has been the seeming mantra for auto-entrepreneurial efforts of the recent past. Efforts spanning various backgrounds and capabilities. The range appears broad, from the relatively recent self-established 'start-up' to seemingly 'semi-sponsored' efforts.

But these too, although generically closer that “Lightweighting” ideal by virtue of feasible construction methods, will need to be securely inter-linked with the conventional (1930s Budd) manufacturing system, so as to exploit synergies and gain the latest vehicle systems sets which underpin those aspirational cars.

To close, with a pertinent segway from where this web-log started, it should be remembered that those light, aerodynamically and electronically sophisticated F1 cars that raced around India's new race track did so on the Buddh International Circuit.

It is apt indeed that in India everything comes full circle and revolves around the national symbol of the wheel.

In India Autos Part 3, investment-auto-motives looks at the present picture for investors reviewing the main automotive players.