Small Traction

India is becoming small car export hub as automakers rush to set up.

Cheap, fuel-efficient and versatile, compact hatchbacks are by far the most popular vehicles in India’s rapidly growing auto market.


And as global automakers rush into the country to set up plants to make similar small cars, both established companies and newcomers see a bigger role for India: Asia’s small car export hub.

Already, South Korea’s Hyundai Motor Co. has shifted its entire production of the Atos Prime, its most popular compact, to the southern Indian town of Sriperumbudur, just outside the port of Chennai. It plans to do the same for the Getz, a premium hatchback.

A third of the cars produced at this plant are exported to 67 countries, from neighboring Sri Lanka to faraway Mexico. By October, Hyundai will complete a second factory nearby, doubling annual production to 600,000 cars, most of them compact hatchbacks that sell for about $7,000.

“We have a very clear target. India will be our export hub, which means all our small cars will be produced here,” said Heung Soo Lheem, chief executive of Hyundai’s India operations.

Suzuki Motor Corp., which owns a controlling stake in Maruti Udyog Ltd., India’s largest carmaker, is investing $2 billion (euro1.45 billion) in India and plans to export 200,000 cars from India by 2010, Chairman Osamu Suzuki said during a recent visit.

Homegrown Tata Motors Ltd. plans to make a $2,500 car, which could set new standards for the auto industry worldwide. The company is setting up showrooms across Africa and has tied up with Italy’s Fiat to use its South American sales network.

Now newcomers like France’s Renault SA, which has rolled out its Logan sedan and hatchback here, are breaking into a market that for years has been dominated by Maruti, Hyundai and Tata.

Renault’s alliance partner Nissan Motor Co. has recently announced plans to make cars in India and export them to Europe.

Spurred by Tata’s ambitions for a super-cheap car, Nissan and Renault also are exploring the viability of a sub-$3,000 car in likely collaboration with Indian partner Mahindra & Mahindra Ltd.

“This could have a big potential – bigger than India,” Carlos Ghosn, CEO of both Nissan and Renault, said recently.

General Motors Corp. has started making small cars here, including the Chevy Spark, a $7,200 compact car that CEO Rick Wagoner said is a “big part of our India strategy.”

Honda Motor Co. has begun building a new plant for premium hatchbacks in western India, and Toyota Motor Corp. and Volkswagen AG are expected to announce similar ventures in coming months.

For now, most newcomers want simply to gain a foothold in India, where J.D. Power and Associates predicts annual vehicle sales will nearly double to 2 million units by 2012. Manufacturers expect annual production to rise well above 3 million cars by that time.


That is huge considering cars were long considered a luxury in this once-socialist style economy. Until the mid-1980s, India’s road were dominated by just a couple of models, including the Ambassador, a simple, boxy mid-sized sedan copied from the British Morris Oxford. The Ambassador met the needs of a small elite and its market was protected with high tariffs.

The government has since eased rules and encouraged expansion of the auto industry amid rising demand from the country’s prospering middle class. Compact hatchbacks, which account for three-quarters of current sales, are expected to continue to dominate.

Analysts say India’s manufacturing could meet the global demand for compacts anticipated as Asia’s middle class grows and consumers worry about higher fuel costs.

India’s proximity to other booming economies in Asia as well as other emerging markets like Africa gives it an advantage, said V.G. Ramakrishnan, director of automotive practices at the consulting firm Frost & Sullivan. And shipping to Europe from India can be less expensive than from Brazil, Thailand or South Korea.

India also offers access to low-cost auto components and cheap labor, Ramakrishnan said. As manufacturing gets increasingly automated, companies can tap the country’s pool of software engineering talent.

Foreign automakers are allowed to set up fully-owned subsidiaries, which could give the country an edge over China, where local partners are mandatory.

The Society of Indian Automobile Manufacturers predicts car exports from India to rise more than five times to 1 million units by 2010, said Dilip Chenoy, director general at the trade body. In the fiscal year ended March 2007, India exported 193,000 cars.

Still, India’s progress toward becoming an exporting base depends a lot on how quickly the government clears such bottlenecks as high taxes and small ports with inadequate transport links.

The government has said it would build infrastructure and simplify foreign investment rules to attract at least $35 billion in new investments in the auto sector through the decade ending 2016. It also plans to lower taxes, especially for companies exporting and manufacturing small cars.

Industry experts, however, feel that the government is not acting fast enough.

At a meeting in New Delhi last week, top executives from Japanese companies asked the Indian government to expedite expansion of the port in Mumbai and build railroads and freeways linking it to manufacturing clusters in northern India, where Honda and Suzuki are adding new plants.

“We have set out policies. Now we got to fix the infrastructure,” said Chenoy. “We will miss the opportunity, if we don’t to do it in the next two to three years.”

One of the biggest obstacles facing Made-in-India cars could be perceptions of shoddy workmanship.

For Hyundai, that has not been an issue so far. When the company began exporting from India in 2000, some customers asked for discounts, presuming that the cars would be short on quality, said Lheem.

“We said no, and they are still buying our cars,” he said. “We make the same quality car here as we make in Korea.”

A J.D. Power survey in the last quarter of 2006 measuring consumer satisfaction and the number of complaints found the quality gap between cars produced in India and in the U.S. had narrowed to insignificant levels.

Perhaps the best proving ground will simply be satisfying India’s demanding, frugal consumers.

They want inexpensive and fuel-efficient cars, durable enough to withstand potholed roads and roomy enough to fit a family of five or six. Plus of course an arctic-level air conditioner.

“Small cars are going to shape the future of the auto industry,” said Chenoy. “And the future of small cars could be in India.”  

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