Top automobile makers like Toyota, Maruti Suzuki and Honda are planning to increase their plant capacities by investing a total of Rs. 11,000 crore in the country soon. This move has been planned despite the current market slump, as it is based on long term projections. However, most company plants are operating only at 60 to 65 per cent efficiency, which means that expansion plans could turn out to be a huge gamble if market size does not increase suitably over the years.
During the FY 2012-13, sales had come down by 7 per cent, which happens to be the worst performance for Indian passenger car market in a decade. Thereby, desperate measures have been taken, such as big discounts, freebies and special edition launches, in order to try and bring some respectability to the overall sales figures. However, top car makers Maruti Suzuki, Honda, Renault-Nissan, Ford and Toyota are banking on the industry's capability to bounce back, for which they have plans to built additional capacity for a total of 1 million vehicles. Reportedly, this figure comes to a third of the total market size at present.
Commenting on the future scenario, R.C. Bhargava, Maruti Suzuki Chairman said, “Our expansion is based on long-term projections.” The company is in the process of investing Rs. 1,700 crore, in order to elevate capacity by 250,000 units. Interestingly, the market needs to grow at a pace of at least 10 per cent a year, so that the additional capacity can be absorbed and utilised. With respect to capacity utilisation, he further added, “The utilisation of new plants completely depends on which direction the market will move. If the market does not go up and demand does not improve, it can hamper companies with high cost of manufacturing.”
Similar to Maruti Suzuki, Japanese auto maker Honda is looking to expand capacity into different car segments and have a market presence at least of 50 per cent, as compared to the present 10 per cent penetration. While Ford India and Renault-Nissan wish to expand capacity for higher exports, Toyota Kirloskar is eyeing both domestic and export markets. But if there is a growth as low as 2 per cent seen in FY 2011-12, huge idle capacity could be witnessed. This seems to be a gamble that the above mentioned manufacturers are willing to take. In addition, 10-15 new launches could also cannibalise sales of existing models in the market, as per Deepesh Rathore, Managing Director (MD) of consulting firm IHS Automotive. But countering the same, he also said, “Every auto maker has its own long-term strategy - on expansions and new products and the short-term slowdown can’t deter long-term aspirations.”
On the same lines, Jnaneswar Sen, Senior Vice-President (sales & marketing) for Honda Cars India said, “Tough times don't last forever. There is enormous growth potential in India.” By investing Rs. 2500 crore, the company wishes to double manufacturing capacity to 2,40,000 cars a year. Its confidence has increased after the launch of diesel sedan Amaze, which witnessed a very positive response. Though only two-thirds of capacity is currently being used for manufacturing, the company is confident that the complete capacity will be utilised for making vehicles in several different segments.
Fluctuation in demand has resulted in domestic auto manufacturers taking a calculated risk. Experts believe that with improvement in Indian and international economic conditions, the market will automatically take off and things would go as expected. However, only time will tell how the capacity expansion plans of the auto companies fare in the long run.