Why Dream of Indian Automotive Growth might not see the light of the day

First a look into what the leading economist are predicting

Just like any other stats, China is a statistician’s delight with any figures that it produces.  With the vehicle sales figures it is no exception.

Take this for stats, China vehicle sales in 1992 was 1 mln which has increased to 18 mln in 2010, which is higher than even US. That’s not it.

But that increase has not been with a gradual CAGR, between 1960 and 2002 China vehicle density rose from 0.38 to 16 vehicles owned per 1000 people but between 2002 to 2008, Chinese vehicle ownership more than doubled, to 37 vehicles per 1000. Now that’s phenomenal. People credit this take off in ownership to a factor, per capita income in China went beyond $4000 in 2002. (src: http://goo.gl/oRkD3).

Now enough of China data, but that’s where my mention of China ends.

A look into the Indian scenario

We need to come to the main topic tonight. No data on China ends without comparison of India. That’s where I am concerned. Vehicle density in India is currently at 15 per 1000 and percapita income is $3300 which is romancing with the benchmark $4000. The expectation is once percapita of India touches $4000 the vehicles sales will take off just like how China did post 2002. This is expected to increase to 110 in 2030.

That’s where I disagree, and think the so called “Dream of Indian Automotive Growth” might not be true after all. This is purely my personal opinion.

Few simple reasons where I feel statisticians/economist might have gone wrong:

1.    Crumpling infrastructure:

One must understand that India is a country which has developed taking the short-cut than developing organically. Normal mode of growth of any economy is from agrarian to industry based and later service industry. This would imply that for the industry to grow economy would have ensured a supporting infrastructure. But India’s development is backed not by industrial growth but by service industry growth (in this case by growth of IT and ITES). This has made sure that people have good income but the necessary infrastructure is still not in place as a base. Which would actually work as a deterrent for anyone planning to buy a car, as his daily commute is filled with traffic jams. There is no place to park cars etc.

2.    Motorcycle factor

The numbers of previous BRIC countries have been taken into consideration while calculating the latent demand of vehicles in India. But one factor which India has was easily missed out. Indian middle class loves to travel in the motorcycle. This does ensure elasticity on people who are moving upwards in their income ladder. In India there is a situation where even people who earn around USD 20,000 travel in motorcycle to their office for the sake of economy and the ease of travelling during the rush hour. Unlike China which like many economist say migrated from cycle to car, there is motorcycle in India in-between.

3.    Excise regulations:

Indian taxation rules tend to increase the cost of vehicle by around 20-25% notice all the developing markets where the ownership rates are near 100 per 1000. The excise is near 5%. This should actually mean the benchmark of USD 4000 should actually be increased to USD 5000 atleast.

4.    Taxation on petrol:

Make a list of countries where the fuel costs are costliest, India will surely figure among the top 5. Reason is unlike other country the taxation is one of the main sources funding exchequer in India, which the govt will not be ready to give up all that easily. Now combine costly fuel with the hours spent in the rush hour traffic. Motorcycle makes more sense, no wonder.

5.    Misconceived size of Indian middle class.

Right from Bush the size of Indian middle class has always been misinterpreted to be around 300 million, but the actual size of Indian middle class (who are the potential market people) is only 40-50 million.

6.    Traditional mindset on House then car.

The moment a family has significant disposable income they are first invested in getting a home than getting a car. Unlike other markets where the vehicle sale has shot up, the Indian mindset fixes priority to house than car. Of course there is exception to this rule, state like Delhi where a family investment goes to a car before house. But not all states share the mindset.

7.    Inflation vis a vis the Increment

One killer market killer in India is the inflation, every time a house hold income increases. They realize that the cost of maintaining the family also increases equally. This results in nullified increase in the income of the family. Even if the actual income can afford a vehicle, the family will tend to set aside amount for the scare of increasing expenses.

8.    Car re-cycle:

For the car sales to increase in a market, the users have to get into the cycle of replacing a car frequently. Meaning atleast once in 5 years similar to many mature markets, Indian cars are run for atleast 7-8 years.

9.   Uninformed buying decision compared to China.

Though it doesn’t have a direct impact on the vehicle number sold, but unlike mature markets and developing markets like Brazil, China and Europe Indian car buying decision are predominantly based on hearsay than research. Thus the traditional carmakers tend to make more sales than new entrants.

Conclusion:

I am not saying that I hate Indian auto industry expanding. It should sound foolhardy to say what many economists predict as incorrect. But all I am just saying that the details being tracked by the many economists is merely based on extrapolation. A look into the ground reality would make them rework on the targets and set some realistic dates. In my opinion, the current spurt in the growth of vehicles will only sustain till 2014-15. Post which Indian market will start to stagnate, unless there are a change in atleast two of the factors mentioned above. Nevertheless, it’s a great time to speculate.