Article translated from http://www.laenderrisiken.de/news100308.php
Frankfurt, Germany, March 7, 2008 (Dow Jones). The echo of the worldwide media reverberated as Tata motor company unveiled the Nano, the most simple automobile of recent years. Weighing little over 1,500 lbs with 30 horsepower and costing only 100,000 rupees ($2,200) this small-size car aims to grant a large portion of India’s population the ability to drive their own car. According to statistics there are 8 cars per 1,000 Indians while China has more than double that at 20 cars per 1,000 people. This might change soon as India has big plans. In 2006, the central government issued an ‘Automotive Mission Plan’, the goal of which is for India to become one of the major world automobile industries by 2016.
The auto manufacturers and ancillary companies estimate that the industry will grow to US$145 billion or 10% of the GDP. The Indian auto industry has up until recently produced mainly motorbikes. They are among the world leaders in this sector producing 8 million motorbikes a year. This compares to 1.5 million cars and 500,00 trucks that left the assembly lines in 2006. The government’s vision is for India to become a significant auto exporter with an expected nine fold increase in cars to be exported within the next 10 years.
India’s own demand for cars has increased so significantly that foreign manufacturers now market their automobiles in India. Small size cars make up the largest share of the market (81%) that is dominated by Japanese and South Korean manufacturers. Demand for limousines and luxury-cars are also on the increase. This brought Volkswagen (VW) to India. Their subsidiary, Skoda, has been manufacturing for the local market at their own Indian facility since 2001. VW itself entered India in 2006 with their upscale models Touareg and Phaeton. VW public relations spokesperson Christina Merzback explains, that VW is implementing a ‘Top-Down Strategy’. Their strategy is to produce and market more affordable models after introducing their premium models. They now manufacture the Passat model in their brand new production facility in Pune. This year VW plans to manufacture the Jetta and after that smaller models will follow. Among those will be a specifically designed small-size car resembling the Polo.
The motorization of India is in progress however, it is limited by the condition of its own national road system. Favorable demographics, a 9% annual economic growth rate and the deplorable neglect of its infrastructure have resulted in a recent call for massive investment. While traveling through the major cities in India today one undoubtedly has to question where there will be road space for all the new cars. The quality and capacity of roads are problematic as is the density of the road network. The Indian road system is already near collapse. Many roads have not been improved since colonial times. Similarly, traffic conditions in the metropolitan areas, ports and airports suffer from congestion. In addition, there is a need for huge investments in energy (supply), water, education, healthcare, environmental protection, housing and telecommunication. In a recent study, experts from Deutsche Bank estimate that India needs to invest more than US$450 billion in its infrastructure by 2015.
Despite all its economic successes, it is hardly possible for the Indian government to accomplish this all by itself. There is no way around private investment. India’s attitude toward private infrastructure investment has greatly improved. Airports, such as Delhi International airport, are privately developed while ports are expanding with the help of private investment. Private public partnerships (PPP) are becoming more frequent. Nevertheless, private investment levels in India are low compared to other emerging markets. Investors criticize the strict environmental regulations. Mathias Umlauf of HSH Nordbank Singapore, confirms that India’s bureaucracy operates very slowly. At the same time, he identifies significant improvements and predicts a future for PPP in India. HSH Nordbank, one of the world’s largest ship and aircraft financers are active in India and have just recently established a subsidiary in Mumbai. HSH Nordbank is looking to expand and engage in realistic and renewable energies in that same region.
The present condition of India’s transport and energy infrastructure greatly inhibits its economic growth. Deutsche Bank estimates that GDP could be 2% higher if these obstacles didn’t exist. The construction and steel industries are very optimistic about future development. Consumption is increasing and many mid-size German companies are looking for opportunities in these highly regulated sectors. Klaus Maier, managing director of Maier and Vidorno GmbH, provides market entry strategy guidance and services to over 50 international companies on a daily basis. He says that products from the construction, engineering and tool industries are enjoying great demand. Yet Maier warns not to underestimate the differences in the market. First impressions of Indian counterparts may seem very positive however, caution is recommended. Factors such as marketing, recruiting personnel or supposedly trivial things like packing or selling through a retailer may become major challenges.
The retail market though is still difficult for foreign companies to penetrate. Small-scale operators, who earn a modest living and make up a large part of the overall population, control the majority of the retail sector. It is for this reason that the government hesitates to open up this sector to foreign companies. The only possibility to enter the market at the moment is with a single brand subsidiary with products of one single brand or from one single manufacturer, like in b2b wholesale. Foreign trade companies such as Duesseldorfer Metro AG operate like this through their subsidiary Cash and Carry.
India’s dynamic growth and rapidly increasing consumer wealth offers attractive opportunities for international companies. ‘The German engineering industry has increased its exports in the subcontinent over the years’ says Oliver Wack, Indian expert with the Association of German Engineering and Construction (VDMA). It’s estimated that the industry has sold US$3.9 billion of machines in India. That makes German machine manufacturers the industry leaders with a 20% market share. VDMA is particularly happy that product piracy and copying is not of major concern in India as it is in other Asian markets.
Unlike China, India is still in the early stages of its economic growth cycle. The decision-making process takes a lot longer in India due to its long democratic tradition, yet the judicial system provides security for foreign enterprises. India has proven in recent years that it can emerge out of China’s shadow. ‘Don’t expect India to replace China as the worlds second workbench’ states Barbara Schmidt-Ajayi, Southeast Asian expert with East Asia Association (OAV) in Hamburg. ‘Foreign investors generally produce for the Indian market’. India can’t compete with China as a production location due to its poor infrastructure, customs, taxes, long-decision processes, rapidly increasing wages and lack of qualified and skilled labor. The service sector is the major exception. According to Schmidt-Ajayi, India’s special economic zones, which were first established in 2000, have yet to make a significant impact.
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