As more players enter the compact and sub-compact automotive segment and set up world-class facilities, India looks to evolve into a global hub for small-car manufacturing.

The country is already the second largest market for small cars outside of Japan, with brisk sales of such models as the Maruti Alto, Swift, Wagon R, Hyundai Santro and Tata Indica. India’s passenger car sales rose to a record 970,000 units between April 2006 and February 2007 and is expected to cross the two million mark in 2010. Small and compact cars make up more than two-thirds of this market.

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European entrants

Although most of the global auto majors have already set up shop in India, the remaining ones are belatedly entering the country. France’s Renault has teamed up with India’s Mahindra & Mahindra; Renault’s Japanese partner, Nissan, has announced plans to join this venture after dumping an alliance with Suzuki; and Germany’s Volkswagen has recently zeroed in on a suitable location for its plant.

Having tested the Indian market, existing players are aware that future demand will largely revolve around small cars. Most of the global players have thus fast-forwarded their plans to make compacts – which will materialise over the next five years with investments reportedly worth $5bn – to challenge the current dominance of Maruti Udyog. The latter has a market share of 55% and its majority owner, Suzuki Motor Corp, is one of the world’s leading small-car producers.

To spur development of the sector, in the annual budget for 2006-07 the government provided tax sops in the form of lower excise duties to encourage small-car production. On the demand side as well, with greater disposable incomes and easier financing options, vehicle ownership has boomed like never before. Yet, for all the gushing talk of ‘the great Indian automobile revolution’, car ownership per 1000 people in the country is only 8.5 – much less than in Sri Lanka.

Given this vast upside potential, Japanese carmaker Honda has started work on its small-car project and plans to build a second automobile plant to sell more than 150,000 compact cars

by end-2010 after investing $150m-$200m. Renault-Mahindra plans to assemble a no-frills Logan sedan – one of the world’s cheapest cars. Nissan, too, has unveiled plans to construct a 200,000 unit a year plant in Chennai, the capital of the southern state of Tamil Nadu, centring on a new compact car that will roll out in 2009 entailing a huge investment of $908m.

Not to be left behind, existing players such as General Motors plan to invest more than $300m to build compacts in its new facility in Pune in the state of Maharashtra. Fiat has an alliance with Tata Motors, currently the second largest maker of cars in the country, and is expected to roll out the Grande Punto, among other small-car offerings for the Indian market.

All eyes are also on what Volkswagen has in mind to take on the competition, but there are reports that its Czech unit, Skoda Auto, is building the Fabia for launch in important emerging markets such as India later this year.

Interestingly, while global majors are mostly eyeing the compact space in India’s car market, some others have decided to take on the last bastion of Maruti’s dominance in the entry-level, the sub-compact segment that they have all avoided so far. Ratan Tata, chairman of the Tata group, has indicated a desire to turn out a ‘People’s Car’ – an Indian Volkswagen – costing $2100. But costs have risen of late and it is unlikely it can be priced less than $3000 before tax, which is roughly half the price of Romanian-built Renault Logan.

“Tata Motors has developed a car which we hope to launch in 2008. It is undergoing tooling at present. It is undergoing trials,” stated Mr Tata, on the sidelines of an Indo-Italian CEO Forum meeting in mid-February.

Rivals, however, are sceptical whether this offering will meet safety and emission standards. But the good news is that the business group has survived a major political controversy over land acquisition for its car plant at Singur in the Communist-run state of West Bengal. The upshot is that the Tatas are confident of rolling out their People’s Car on schedule.

Toyota challenge

By far the most serious challenge to Maruti’s leadership will be from Toyota, which has a subsidiary, Daihatsu, with several small-car models to chose from to take on Maruti. Indications are that the Japanese giant will build a new factory in India as early as 2009 to produce 150,000 low-cost cars.

Toyota has not yet divulged its plans but reports indicate its desire to sell a cheap family car for less than $6500. It has also invited requests for quotations from Indian suppliers at a meeting in Tokyo in February.

Maruti, for its part, is acutely aware of the gathering challenge to its dominance. The company is rapidly expanding capacities to remain ahead of its rivals in the volumes business with a $2bn-plus investment. The company thus hopes to produce one million cars by 2010 and retain its current market share, even when overall vehicle sales in India expand to two million.

By then, the company will also produce more cars in India than Suzuki does in Japan and emerge as its premier global hub for small cars. Even though Nissan has broken its alliance, it will continue to source 50,000 cars for export to Europe. Maruti will separately export 100,000 units to Europe under the Suzuki badge.

“Cars manufactured at Maruti’s facilities for Nissan demonstrate the confidence that the global car leader has in our manufacturing capability. These 50,000 cars for Nissan will mark the beginning of contract manufacturing in India,” says Jagdish Khattar, Maruti’s managing director. The fact that Maruti will contract manufacture 50,000 cars for Nissan for export to Europe, he believes, “is a major step in the direction of Maruti as Suzuki’s global hub for compact car manufacture”.

And so too for India’s ambition to be a big player in small cars.