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The Great Indian Car Bazaar

It was almost after five years that on a weekday morning R C Bhargava wore a coloured shirt and pant. It was his first day of retirement. Having spearheaded Maruti Udyog Ltd's success in the Indian car industry as managing director, Bhargava was feeling happy, sad, and a bit apprehensive.

Happy that Maruti is today one of the most admired companies in India with a 82 per cent market share.

Sad that the relationship between Maruti's two partners, the Government of India and Suzuki Motors of Japan was souring and that it would eventually affect Maruti's performance.

Apprehensive that for the next three months, he would have to be in New York undergoing treatment for prostrate cancer.

This mixed bag of emotions is not a state-of-mind that only Bhargava suffers from. Almost every CEO of a car manufacturing company in India -- and especially the global auto giants who have launched/or are to launch their models -- feel the same. They are all happy about the promise that is India. Sad that in reality their expectations have not been fulfilled. And apprehensive that they are driving down the wrong lane in the Great Indian Car Bazaar.

Take a look at the midsize car market featuring models between 1000cc and 1500cc, priced between Rs 300,000 and Rs 800,000. There are six manufacturers at present. In the next three to five months, three more will drive in. And what is the market size they are fighting for? About 60,000 cars per annum which has been growing at a little less than one per cent over the last year!

"The pie has not grown as much as these new entrants expected it to," explains Bhargava, adding "The piece of cake has become smaller. New players like General Motors, Ford, and Daewoo are finding it increasingly harder to survive... it's not that the whole market is growing and so everyone can have fan. One new car sold is one car sold less."

A fortnight ago, when I met S G Awasthi, managing director of Daewoo Motors India, he admitted that inventory was piling up. But he was confident that the market would look up early next year when Daewoo would launch its second midsize model, Nubira, in India. Mahindra-Ford, who have sold a little more than 5,000 of their Escort model in a year (less than what the company sells in a day in North America) also believe the same. Ditto General Motors India.

But with Hyundai's Accent, Mitsubishi's Lancer, and Honda's City all expected to roll out in the next four months, how are these companies going to do well? Is the per capita income of Indians going to shoot up so much that these models are going to busily zip down Indian roads?

The answer is no. So why are auto giants queuing up to invest in India? There are three reasons:

A. It is not the midsize market these auto giants are interested in. It's the small-car market. Industry estimates show that around 450,000 cars were sold last year. Small cars (dominated by the Maruti 800cc) account for nearly 75 per cent of this market which translates into a cool 357,500 cars per annum. It obviously makes sense to go into this market. But to get a bite of these large volumes, you need large investments. As shown, $ 100 million to $ 200 million is enough to launch you into the midsize -- see General Motors, Peugeot, Mitsubishi. But if you have to be in top gear, then you need investments above $1,000 million -- examples set by Hyundai and Daewoo. Both these Korean majors are also launching their small car models next year.

B. The definition of the small car in Indian household will change. As income level increases, so will the affordable price band. Cars costing between Rs 200,000 to Rs 450,000 will come to symbolise a high-growth segment. Which means Maruti's Zen, Fiat's Palio, and Ford's Fiesta will rub shoulders with Daewoo's D'Art City, Hyundai's Concept HMX, and Telco's Indy car. In India this is where the moolah will continue to be. And all the auto majors are waiting for this transformation to take place. The brisk sale of Maruti's Zen is a happy indicator of things to come.

C. Finally, for global auto giants, India is a good testing place. Worldwide the concept of car manufacturing is moving towards what is now being fashionably called production of world cars. This means that a company produces the same model of the car in various parts of the world to capture the global market. Modifications are made to suit regional taste. Honda's Civic, Ford's Taurus, Fiat's Palio... all these are just a harbinger of car manufacturing in the days to come. These are projects worth billions of dollars.

And when such days do come, what is a couple of million dollars spent along the Indian highways? Who cares if the Cielos and Escorts of the world do not sell much in India? There is always Africa.