Car manufacturers have said that they will invest $6 billion in India to raise the yearly production of vehicles to more than 6 million units. However, a large portion of this figure could remain unsold for several years.
In financial year ending March 2011, 2.5 million cars were purchased by Indian consumers, a hike of 63 percent over the previous two years. However, the increasing rate of interest and fuel prices put a brake on this sales boom since April 2011.
According to Society of India Automobile Manufacturers (SIAM), sales of vehicles will go down in the fiscal year ending March 2012 for the first time in 10 years. It will ultimately lead to surplus of around 1 million cars, which will result in a position where manufactured cars will have no buyers. The market may also see a price war among competing companies in a bid to attract customers.
Margins of auto makers have been largely hit over the past year because of increasing commodity rates. Between October-December 2011, Tata Motors recorded a profit of 7.2 percent in India, which was 9.7 percent in the previous year.
Maruti's chairman, R.C. Bhargava said, “If everybody comes along with what they say they are going to do, we are definitely going to have serious surplus capacity. With more manufacturers coming, everyone will have to work with thinner margins.”
Bhargava also said that in the coming few years, the capacity could be 30 to 40 percent more than demand for the vehicles. Therefore, the car maker has now decided to let ‘market conditions' to direct the developments at its $1 billion new production facility. Earlier, the company was expecting to manufacture around 2,700 cars per day from this new plant.
In July 2011, Toyota Motor Corp had said it will double its production to 3,10,000 vehicles by investing $220 million in India by 2013. Ford had also announced a $900 million facility to increase its production to 6,00,000 in the country. Last month, Peugeot said that there could be a delay in setting up its $850 million plant, which is expected to have production capacity of 1,70,000 cars per year.
However, P. Balendran, Vice-President of General Motors India was pleased with the developments in the industry. He said, “We have already created the capacity and are aligning production to suit demand. Since we expect double-digit growth in the next financial year, we do not envisage any capacity utilisation fall.” In May 2011, the auto maker said that it was investing $500 million in order to raise its capacity to over 400,000 units.
On the whole, factory utilisation has lessened with capacity build-up and market slowdown. However, there are other car makers that are working continuously to meet customers' demands. The diesel variant of Maruti Swift has a six-month long waiting list and 25000 buyers applied for just 7200 units of Mahindra XUV 500.
Renault-Nissan is particularly targeting exports from India, thereby protecting itself from the slowdown. It is all set to double its production facility to manufacture 4,00,000 units.
Regarding this Michael Boneham, President, Ford India, said, “The sales slowdown is creating a short-term concern domestically. But we're not depending on one market. Our growth is both domestic and export focussed and we have a flexible manufacturing process. We're not taking our foot off the pedal.”
SIAM is expecting an increase of 11-13 per cent in car sales in 2012-13, projecting sales estimates of 2.8 million. This figure has been released after Reserve Bank of India (RBI) indicated the end of increase in rate of interest. However, the problem of excessive production will still persist. Even though the export rate from India is quite well, only 5,50,000 cars are likely to be exported from India this financial year.
