India the next destination for Auto industries

India from the beginning of the year has been in the news for various events that has marked the period some of them have made a deep mark in the Indian corporate world, Sensex witnessing an all time high touching 21K mark in Jan to a free fall in May. Not only India but with the start of this year many developed and developing counties have noted down various events which would be a lesson to learn for the future generations to come.

From the sub-prime crises which triggered a slowdown of U.S economy and the buyout of its financial heavy weight “Bear Stern” by JP Morgan, but the much said bad is still not over with the with the fresh news coming and once again rocking wall street with the loss booked by yet another big financial house ‘Lehman Brother’ and raising concern over the huge pile up of bad loans in its balance sheet, shaking investor confidence. Even small news by some unknown sources published by journals tremors the indexes by 3 to 5% a day. In era of such volatility the investor is left with no choice but to wait and watch and hope for the best. But in such an environment what is management doing? The success and the failure of the management are tested in such times where a single decision decides the fate of management credential and the overall existence of the company.

In such and volatile market situation even the emerging markets are facing tough time to maintain their GDP growth record and are running hard to meet targets. I am writing this article to discuss the happening in the auto market in general; since I have been looking at these companies in GSR I would like to share some of the events from my sectors, but will be focusing from the point of view of Indian auto industry.

The year starts with a $2,300 M acquisition of Jaguar and Land Rover by Tata Motor Ltd. The purchase consideration included the ownership by Jaguar and Land Rover or perpetual royalty-free licenses of all necessary Intellectual Property Rights, manufacturing plants, two advanced design centers in the UK, and worldwide network of National Sales Companies. The event marked a special place in the world of auto industry for India.

The second but the most controversial news was the launch of Nano (The people’s car for India) by Tata. With the successful road test of car and approval by the authorities Tata has again made itself in news but the most red and published news is the Nano plant which has hit a road block with no arrangements being worked out by West Bengal Govt. to cheer both Trinamool Congress and the Tata’s.

Amidst these events there are other news and events which have changes the battle ground for auto players in India and made India a lucrative market where new models and variation have been launched and the entry of new players by JV or direct entry.

Some events to name are:

The announce of Nissan’s GT 2012 plan by the CEO Carlos Ghosn, which involves investment of $575 M in India in the way of JV with the Hinduja Group flagship Ashok Leyland for power terrain manufacturing and expansion of its LCV (Light Commercial Vehicle) business in India.

Honda motor, launch of Hybrid car in India in response to the rising fuel prices. And sudden ramp up of by other players such as Bajaj and Volkswagen a German car maker registering good growth in the luxury car segment.

The slowdown of the U.S economy and lower sales number in that market all the major players have ramped up there operations outside U.S and Indian has been the lucrative destination for many auto majors such as Honda, Nissan and even General Motor have reported to make India there supply centre to cater to the rising demand in Asia Pacific region and also to adapt to the domestic growth.

But in the recent months the market dynamics have changed its course once again with the inflation touching its peak, forcing RBI former chief Y.V Reddy announcing increase in CRR and Bank Repo rate by 25 bps and 50 bps respectively to control the supply of money and to tame the beast. The market has reacted very sharply as majority of the stocks in the BSE witnessing further downward moment and decline in futures volume. If this had not been enough the appreciation of US$ have added further more to the bear sentiments bringing all IT giants to book and impact on their revenues which are already in pressure due to the decline in contracts from U.S.

The banks in a move to safeguard their net margin have risen lending rated and it is as high at 14 % being offered by banks. The rising inflation and interest rates have forced many corporate to defer there investment plans. Even the FII’s have adopted the strategy of wait and watch. The most hit is the reality sector which is facing a serious problems sourcing for there working capital requirements.

Well the auto sector is also witnessing a dent in their revenue. Car sales declined 4.36% in August as higher loan rates hurt demand for mid-size cars and hatchbacks.

Maruti which holds the major share witnessed sales decline by 10.07% in August to 46,811 as against 52,055 in the same month last year. Tata Motors sales dipped 10% to 12,216 compared to 13,588 last August. Honda Siel Cars and Ford India registering negative growth in the passenger-car segment. South Korean major Hyundai Motor India was the only player who posted the largest increase of 34.08% to 21,607 as against 16,115 in the same month last year due to its newly launched i10.

All of these owing to higher interest rate, inflation and infrastructural constrains due to decline in the investments in the much needed sector.

But, despite all the negativity in the environment analyst at the Dalal Street believes that the situation would cool down in the near future. So what is the reason they are saying so?

Well the country’s GDP growth at around 7.9% has developed a sense of confidence in the Indian industries. The fundamentals of the Indian market is said to be strong by many analysts as the consumption demand has been healthy, with the 14.4% expected increase in average income this year. Analysts believe a small favoring move by RBI or decline in Inflation rate could clear the way for the auto manufacturers also the festival season nearing and decline in the crude oil price to $98.65 have added to their good factors.

The increases in the operation of the auto majors in India have shown the potential lying ahead for them in India. But the fuel crises is still far from over and it is expected that the oil prices will remain above $100 a barrel.

The auto majors have to change their strategy and will have to focus on more fuel efficient cars to allure the pocket conscious customers in India. Few companies such as Honda have already beguine its quest in the newer sources of energy such as the Hydrogen Fuel Cell run car. The future of these company will be decided by their ability to adapt like a chameleon and outshine the under performers.