Car sales head for magic million
By CNN's Asia Business Editor Geoff Hiscock
 |  The Maruti-Suzuki joint venture set up in 1983 produced its 4 millionth vehicle in 2003. |
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|  VIDEO |
 Old meets new as India attempts to balance its high tech future with a traditional past.
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| GRADUAL APPROACH | INDIA'S GROWTH
Recent GDP rates
1998-99: 6.5 percent
1999-00: 6.1 percent
2000-01: 4.4 percent
2001-02: 5.8 percent
2002-03: 4.0 percent
2003-04: 8.2 percent
2004-05: 6.4 percent (F)
India's financial year ends March 31
Source: Morgan Stanley
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MUMBAI, India (CNN) -- This week's $90 million decision by Japanese auto maker Suzuki to open a new diesel plant and a second car assembly plant in India is indicative of a $5 billion industry that sees blue skies ahead.
This year, sales of new cars and utility vehicles in India will top the magic one million mark, as rising incomes put spending power into the hands of a whole new band of potential owners.
While that is well below the two million sales achieved in China last year with a similar population of one billion-plus, there is plenty of upside for Indian makers, their joint venture partners and the swag of overseas brands bidding for market share.
The desire for a new Maruti Zen, a Tata Indica, a Honda City, a Hyundai Getz, a made-in-India C-class Mercedes, or even a venerable second-hand Premier -- the Morris Oxford clone that was a staple of the Indian automotive scene from 1955 onwards -- has never been higher.
That demand has been fed by a strong domestic economy, increased government spending on roads, fierce competition among makers that has brought car prices down, and a greater willingness among consumers to see the car as part of their ordinary lives.
Manufacturers are responding with an even wider range of models, including domestic high-end SUVs such as the Mahindra Scorpio and Tata Safari, and have lifted their marketing efforts.
According to the latest market research, spending on advertising for cars and utility vehicles this year is up 80 percent year-on-year. The size of the market is growing at about 15 percent a year.
And, say industry participants, there is still plenty of room to expand.
Tata Sons executive director R. Gopalakrishnan told CNN in Mumbai recently that despite inflation pressures and recent rises in the price of oil, the long-term outlook for India's automotive industry was "very positive".
"Penetration is still very low, so the potential consumption ahead is high," he said.
The Tata Group launched what it says was the country's first truly home-grown car, the Tata Indica, in December 1998.
Until then, cars available in India were based on old British and Italian models, or were the product of joint ventures with U.S., Japanese, Korean and European makers.
While previous predictions for automotive industry growth have faltered on a variety of factors, including the impact of the monsoon on rural incomes, there is no doubt that spending on two and four-wheel vehicles in India is intensifying rapidly.
According to AC Nielsen's managing director in Mumbai, Russell Farmery, cars and two-wheelers are among the hottest items for richer families.
"Urban disposable incomes have shot up," he said. "People are spending money on mobile phones, holidays, consumer durables, two-wheelers and cars".
Media trend watcher Divya Gupta, president of Media Edge, agrees that consumer optimism is very high.
"There is an increased will to spend," she said. "And there is a new leisure class emerging who are interested in international and domestic travel."
But road travelers in India have to contend with difficult conditions. Roads are crowded, carry an unsafe mix of vehicle types from heavy trucks to pony-carts, and often are in poor shape -- particularly after the monsoon rains.
While the country's physical infrastructure lags far behind that of China, the new government of Manmohan Singh has committed to a major upgrade of public works, including the national highways that link the major population centers of New Delhi, Mumbai, Chennai and Kolkata.
The conventional wisdom is that China -- which produced 4.4 million motor vehicles last year -- is the world's hottest car market.
But taking a slightly longer view, a recent study by consultants McKinsey suggests India may be a better bet than China as a global low-cost car manufacturing base.
Until 1983, high tariffs and a ban on foreign investment shielded state-owned carmakers such as Premier Automobiles Ltd (PAL) from global competition, McKinsey says.
But in 1983, Suzuki was allowed to take a minority stake in a joint venture with Maruti Udyog. That led to increased competition, with another eight carmakers joining the fray.
The government further liberalized outside investment in the industry in 1992, leading to a fresh influx of makers.
According to McKinsey, car prices in India have fallen by 8 to 10 percent a year since then, and labor productivity has increased sharply.
"In view of the greater competitive intensity in the market, India may be better positioned than China is to become a global low-cost auto manufacturing base," it concluded.
