India :becoming a manufacturing hub for small cars

Q:How does Indian passenger car market differ from other developing automobile market and how do you see it evolving going forward?

A:The key difference between Indian and other south East Asian passenger car market is the proportion of mini car segment compared to the overall market. Small or mini car segment comprises almost 70 percent of the total passenger car market and this is likely to continue going forward, and even grow from 70 percent levels.

Larger sized cars will also grow within the overall market but passenger car market in India is likely to be overwhelmingly dominated by small or mini cars over the next few years in India. As against this, in most of the other south East Asian market, small cars would constitute just 20 percent of the overall market. That's the big difference between India and other comparable markets in south East Asia including China.

Q:What according to you is the reason for this dominance?

A:There are essentially two reasons for this dominance of small cars in India. Firstly customers for passenger cars have historically been offered a value proposition in small cars by local manufacturers and they have come to accept small cars as their idea of a passenger car. Its largely a legacy factor which has played a role here.

Secondly, there is the question of affordability as cars were manufactured and offered as a value proposition so customers here could afford them. But in case of other markets like Malaysia or China, local firms have always manufactured big cars meant to be used as a family vehicle. We have examples of local manufacturers like Proton in Malaysia or numerous car manufacturers in China, none of whom are established as small car manufacturers. In other words, we are largely looking at a historical reasons for dominance of small cars in India. In other south East Asian market family sedans or multi purpose vehicles are more popular. It also has to do with higher purchasing power as average income in these countries has been higher than what it was in India and so customers can afford to buy bigger cars.

Q:Has lower excise duty structure for small cars in India created a distortion in the market?

A:Honestly speaking it does create distortions in the market but such duty structure that incentivise particular kind of vehicles, small cars in case of India, exists in most markets of the world. In many countries around the world, governments do put up a duty structure which is intended to provide incentives for particular vehicle category and small cars consume lesser fuel and also make do with lesser space for driving and parking.

Q:Do you forsee India becoming a manufacturing hub for small sized cars?

A:India has a very good opportunity for being a manufacturing hub for small cars. India already is a very big market for small cars and over a period of time with more manufacturers looking to manufacture large number of small cars will lead to scale economy and efficiency in production in the manufacturing process bringing the costs down. Most global manufacturers will look to source such cars from India if it meets their quality and other criterias.

As far as we are concerned, our primary focus is to get this new plant here in Pune up and running. We are currently a small player in the Indian market due to absence of a small car in our product portfolio and this will be addressed soon. We do not have any specific export programme as yet for Spark as we are primarily looking at Spark for filling the existing gap in our product portfolio here. But we will certainly consider exporting small cars from here to some of the markets in Europe and Latin America, which have significant demand for small cars. We manufacture Spark in South Korea, China and Colombia in Latin America, which cater to requirements in these regions. India will be the fourth country to be added to this list when the Pune facility goes on stream by early 2008. I must add that one of the predecessors of Spark is also manufactured in our eastern Europe plant.

Q:GM has major design and product development activity in South Korea. Could you elaborate on what these activities are and what do they mean for your Indian operations?

A:Our design and development center in Bangalore is working very closely with product development center in Korea and this will lead to acquisition of technology and capabilities for our Indian unit.

We export Spark, Aveo and Optra in addition to a sedan and a Sports Utility Vehicle (SUV). Our Korean operation is big and is likely to grow bigger but there is very close cooperation between Indian and Korean operations in terms of technology and product development effort. We are developing products like power train systems in India in close association with Korean operations.

Q:Why has GM not been sourcing components from India in a big way compared to China?

A:So far we have operated on smaller scale and volumes in India compared to Korea and Indian suppliers have not been competitive enough to grab business away from our Korean suppliers. We believe that growth of domestic market is critical for development of a quality and reliable supplier base and we have not achieved that in India as yet. Our experience in terms of sourcing components has been much better in Korea due to larger size of our operations in that country. We have achieved around 85 percent localisation in Korea with local suppliers there meeting upto 85 percent of GM's requirement for the domestic market. Additionally GM sources auto components worth nearly one billion from Korea for meeting GM's global requirements. It is very difficult to export without a strong domestic base and this is as true for cars as for components that go into it.