And as the small-car market develops, Tata and Maruti are also making inroads into the entry midsized category ($20,000 vehicles), which represents particularly fertile ground — it is expected to grow by 27 percent over the next five years. At present, the Honda City, Hyundai Accent, and Maruti Esteem are the leading entry midsized models.
For the remarkable opportunities in the Indian automotive industry to develop, however, significant challenges must be faced. For one, India’s economy, with its decade of strong growth, must continue to expand in an unstable global environment. Indeed, it has shown signs of a slowdown in recent months. By extension, consumer lending has already been affected. Although interest rates have been reduced, the percentage of loan approvals has also declined. Consequently, many customers are “trading down,” choosing fewer frills or even lower-end models than they may have previously selected. To sustain sales growth, manufacturers, dealers, and consumer finance groups must work together to build innovative financing options for consumers.
Given that backdrop, the four-wheel passenger vehicle market is expected to grow at approximately 8 to 10 percent this year, far below the historic 21 percent compounded annual growth rate in 2006 — but healthy nonetheless. The two-wheeler segment has shown some resistance to the global crisis; however, in the event of a broader market collapse, this segment could suffer as well.
Meanwhile, higher commodity prices could also interfere with market development. Commodity prices may be depressed in a slowing worldwide economy, but most forecasters expect them to rise rapidly once global economic growth recovers. A return to high steel prices will impact sales of the new ultra-low-cost cars, because automakers will have little option but to pass on cost hikes to low-wage consumers. Oil and other commodity price increases could also make automobiles less desirable.
To succeed in the Indian market, local manufacturers must further reduce the total cost of car ownership and bring financing and insurance models up to modern global standards. And to beat rising input costs, Indian automakers must improve their net cost position by increasing productivity and performance. Moreover, if Indian auto companies such as Tata hope to compete effectively against their primarily Japanese and European rivals, they must increase global sales for faster recovery of fixed costs and match the product cycle times of international manufacturers.
To meet these challenges, the Indian government must also get involved. For example, mandating higher fuel efficiency for passenger vehicles, setting antipollution policies, and enforcing safety standards in line with those of Europe and North America will take older cars off the road and boost the image of the Indian auto industry, so that it can be taken seriously as an exporter. In addition, the government must maintain spending on infrastructure. India currently has only 3,700 miles of highway, compared with 25,000 miles in China and 46,000 miles in the United States.
In many ways, this period represents a once in a lifetime opportunity for Indian automakers to take advantage of a vast new market in their own backyard — a market that global companies thus far have enjoyed. 
Author Profiles:
-
Vikas Sehgal is a partner with Booz & Company in Chicago. He specializes in product strategy, innovation, emerging markets strategy, and globalization for automotive, transportation, and industrial companies.
Matthew Ericksen is a partner with Booz & Company in Chicago. For more than 20 years, he has worked with industrial companies to define winning strategies and the organizational and transformational programs required for success.
Ganesh Panneer is an automotive and industrial products specialist working with Booz & Company, focusing on product strategy, innovation, and emerging markets strategy.
Also contributing to this article was Booz & Company Senior Associate Sunil Sachan.
