Analysis Of Automobile Industry 3a4p5w

ANALYSIS OF AUTOMOBILE INDUSTRY Over a period of more than two decades the Indian Automobile industry has been driving its own growth through phases. With comparatively higher rate of economic growth rate index against that of great global powers, India has become a hub of domestic and exports business. The automobile sector has been contributing its share to the shining economic performance of India in the recent years. To understand this industry for the purpose of investment we need to analyze it by following two approaches: 1). Fundamental Analysis (E.I.C Approach) a. Economy b. Industry c. Company 2).Technical Analysis 1) FUNDAMENTAL ANALYSIS a). ECONOMY Economic analysis is the analysis of forces operating the overall economy a country. Economic analysis is a process whereby strengths and weaknesses of an economy are analyzed. Economic analysis is important in order to understand exact condition of an economy. GDP and Automobile Industry In absolute , India is 16th in the world in of nominal factory output. The service sector is growing rapidly in the past few years. This is the pie- chart showing contributions of different sectors in Indian economy. The per capita Income is near about Rs38,000 reflecting improvement in the living standards of an average Indian. Today, automobile sector in India is one of the key sectors of the economy in of the employment. Directly and indirectly it employs more than 10 million people and if we add the number of people employed in the autocomponent and auto ancillary industry then the number goes even higher. As the world economy slips into recession hitting the demand hard and the banking sector takes conservative approach towards lending to corporate sector, the GDP growth has downgraded it to 7.1 percent for 2008-09 and predicted it to be 6.5 per cent for FY 200910 Mr. Montek Singh (Planning Commission of India). Following is the graph showing a trend of Indian GDP trend in past 3 years.

The market value of Automobile Industry is more than US$8 bl. and Contribution in Indian GDP is near about 5% and will be double by 2016. The automotive industry in India grew at a computed annual growth rate (CAGR) of 11.5 percent over the past five years, but growth rate in last FY2008-09 was only 0.7% with enger car sales shows 1.31% growth while Commercial Vehicles segment slumped 21.7%. Recession All the major auto companies enjoyed the high growth ride till the mid 2008. But at the end of the year, industry had to face the hard truth and witnessed the fall in sales compared to last year. In December 2008, overall production fell by 22 % over the same month last year. Global recession has hit the Indian auto industry, India is strong and growing industry but the impact of recession is evident now on industry as sales & growth of automobile companies have declined. enger Vehicles segment ed negative growth. One of its ing facts is that the sales in December 2008 for enger vehicles fell by 13.86% over December 2007 Two Wheelers ed minor growth of 1.85 % during April – December 2008. However, Two Wheelers sales recorded 15.43 percent fall in December 2008 over the same month last year. Although the sector was hit by economic slowdown, overall production (enger vehicles, commercial vehicles, two wheelers and three wheelers) increased from 10.85 million vehicles in 2007-08 to 11.17 million vehicles in 2008-09. enger vehicles increased marginally from 1.77 million to 1.83 million while two-wheelers increased from 8.02 million to 8.41 million. Total number of vehicles sold including enger vehicles, commercial vehicles, two-wheelers and three-wheelers in 2008-09 was 9.72 million as compared to 9.65 million in 2007-08. Inflation Despite of negative inflation these days (-.21% on 22-Aug-09) we saw an increasing trend of sales in auto sector. A moderate amount of inflation is important for the proper growth of an economy like India because it attracts more private investment. The fall in wholesale prices from a year earlier is mainly due to a statistical base effect and doesn’t suggest contraction in demand, the Reserve Bank of India said few week back, while revising its inflation forecast for the FY through March to around 5% from 4%. In last FY despite of skyrocketing oil prices (crude oil price has already up to $130 compared to $20 per barrel five years back), Indian automobile Industry was not as much affected and experts think that Indian automobile industry will continue to grow this year despite all obstacles- oil price hike, higher interest rates. However, the effect of inflation has affected every sector which is related to car manufacturing and production. The increase in the price of fuel and the steel due to inflation has led to a slower growth rate of the car industry in India. The effect of inflation has taken the rise in the price rate of the cars by 3-4% which in turn suffices the need to meet the rise in price of the raw materials to build a car. The car market and the car industry witnessed a fall of 8-9%.

Indian Automobile Industry at Global level: • • • • •

India ranks 1st in the global two-wheeler market India is the 4th biggest commercial vehicle market in the world India ranks 11th in the international enger car market India ranks 5th pertaining to the number of bus and truck sold in the world India is the second largest tractor manufacturer in the world.

Volkswagen, Toyota, Nissan & Ford plan new cars to cash in on fastest-growing compact car section of car market in India. Source: Economic Times Sales of different Auto Companies speed up even before festive season Maruti by 29%, TATA by 11%,Skoda Auto 33%, Hero Honda 33%, Mahindra 42%, Yamaha 63% etc. Source: Economic Times (3/09/09) It is expected that the Automobile Industry in India would be the 7th largest automobile market within the year 2016. Projected Growth rate in Automobile Industry • enger vehicle sales in the country will grow at a CAGR of 12 per cent to touch 3.75 million units by 2014. • The domestic two-wheeler sales will grow at a CAGR of 8.8% by 2014 at 11.3 million units. • To emerge as the destination of choice in the world for design and manufacture of automobiles and auto components with output reaching a level of US$ 145 billion ing for more than 10% of the GDP and providing additional employment to 25 million people by 2016. b.) INDUSTRY ANALYSIS (AUTOMOBILE) The current trends of the global automobile industry reveal that in the developed countries the automobile industries are stagnating as a result of drooping markets, whereas the automobile industry in the developing nations, have been consistently ing higher growth rates every ing year for their domestic flourishing domestic automobile markets. Being one of the fastest growing sectors in the world its dynamic growth phases are explained by the nature of competition, Product Life Cycle and consumer demand. The industry is at the crossroads with global mergers and relocation of production centers to emerging developing countries. In 2009, estimated rate of growth of India Auto industry is going to be 9% .The Indian automobile sector is far from being saturated, leaving ample opportunity for volume growth.

Segmentation of Automobile Industry The automobile industry comprises of Heavy vehicles (trucks, buses, tempos, tractors); enger cars; Two-wheelers; Commercial Vehicles; and Three- wheelers. Following is the segmentation that how much each sector comprises of whole Indian Automobile Industry.

Industrial Analysis of any industry can be done based on the following headings: 1. Five Forces Model 2. BCG Matrix 3. Industrial Life Cycle 4. SWOT Analysis 5. Industry Specific Index 1.) Five Forces Model Michael Porter identifies five forces that influence an industry. These forces are Degree of Rivalry Despite the high concentration ratio seen in the automotive sector, rivalry in the Indian auto sector is intense due to the entry of foreign companies in the market. The industry rivalry is extremely high with any being product being matched in a few months by the competitors. This instinct of the industry is primarily driven by technical capabilities acquired over years of gestation under the technical collaboration with international players. Threat of Substitutes The threat of substitutes to the automotive industry is fairly mild. Numerous other forms of transportation are available, but none offer the utility, convenience, independence and value offered by automobiles. The switching cost associated with using a different mode of transportation, may be high in of personal time, convenience and utility. Barriers to entry The barriers to enter automotive industry are substantial. For a new company, the startup capital required to establish manufacturing capacity to achieve minimum efficient scale is prohibitive. Although the barriers to new companies are substantial, establishing companies are entering the new markets through strategic partnerships or through buying out or merging with other companies. However, a domestic company, with local knowledge and expertise, has the potential to compete its home market against the global firms who are not well established there.

Supplier’s power In the relationship between the industry and its suppliers, the power axis is tipped in industry’s favor. The industry is comprised of powerful buyers who are generally able to dictate their to the suppliers. Buyers’ Power In the relationship between the automotive industry and its ultimate consumers, the power axis is tipped in the consumers’ favor. This is due to the fairly standardized nature and the low switching costs associated with selecting from among competing brands. 3.) Industrial Life Cycle The industrial life cycle is a term used for classifying industry vitality over time. Industry life cycle classification generally groups industries into one of four stages: pioneer, growth, maturity and decline. In the pioneer phase, the product has not been widely accepted or adopted. Business strategies are developing, and there is high risk of failure. However, successful companies can grow at extraordinary rates. The Indian automobile sector has ed this stage quite successfully. In the growth phase, the product market has been established and there is at least some historical guide to ground demand estimates. The industry is growing rapidly, often at an accelerating rate of sales and earnings growth. Indian Automotive Industry is booming with a growth rate of around 15 % annually. The cumulative growth of the enger Vehicles segment during April 2007 – March 2008 was 12.17 percent. enger Cars grew by 11.79 percent, Utility Vehicles by 10.57 percent and Multi Purpose Vehicles by 21.39 percent in this period. The Commercial Vehicles segment grew marginally at 4.07 percent. While Medium & Heavy Commercial Vehicles declined by 1.66 percent, Light Commercial Vehicles recorded a growth of 12.29 percent. Three Wheelers sales fell by 9.71 percent with sales of Goods Carriers declining drastically by 20.49 percent and enger Carriers declined by 2.13 percent during April- March 2008 compared to the last year. Two Wheelers ed a negative growth rate of 7.92 % during this period, with motorcycles and electric two wheelers segments declining by 11.90 percent and 44.93% respect. However, Scooters and Mopeds segment grew by 11.64% and 16.63% respect. The growth rate of the automobile industry in India is greater than the GDP growth rate of the economy, so the automobile sector can be very well be said to be in the growth phase. As the product matures, growth slows as penetration reaches practical limits. Companies began to focus on market share rather than growth. Industry demand tends to follow the overall economy, but the scope of growth of the automobile sector is very much possible in India due to the increasing income of the middle class and their income as well as standard of living.

4.) SWOT Analysis A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis. SWOT analysis of the Indian automobile sector gives the following points: Strengths • • • • • 

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Large domestic market Sustainable labor cost advantage Competitive auto component vendor base Government incentives for manufacturing plants Strong engineering skills in design etc

Weaknesses • Low labor productivity • High interest costs and high overheads make the production uncompetitive • Various forms of taxes push up the cost of production • Low investment in Research and Development •  Infrastructure bottleneck Opportunities • Commercial vehicles: SC ban on overloading • Heavy thrust on mining and construction activity • Increase in the income level • Cut in excise duties • Rising rural demand Threats • Rising input costs • Rising interest rates • Cut throat competition

Government Policies Towards Indian Automobile Industry Automobile industry in India also received an unintended boost from stringent government auto emission regulations over the past few years. This ensured that vehicles produced in India conformed to the standards of the developed world. Though it has an advantage in India, thanks to low costs and government policies it soon faces stiff competition from it multinational competitors all eyeing for a share in the ever growing Indian auto sector. The policies adopted by Government will increase competition in domestic market, motivate many foreign commercial vehicle manufactures to set up shops in India, whom will make India as a production hub and export to nearest market. •

Bring in a minimum foreign equity of US $ 50 Million if a t venture involved majority foreign equity ownership

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Automatic approval for foreign equity investment upto 100% of manufacture of automobiles and component is permitted

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FIIs including overseas corporate bodies (OCBs) and NRIs are permitted to invest up to 49 per cent of the paid-up equity capital of the investee company, subject to approval of the board of directors and of the by way of a special resolution.

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Investments in making auto parts by a foreign vehicle maker will also be considered a part of the minimum foreign investment made by it in an automaking subsidiary in India. The move is aimed at helping India emerge as a hub for global manufacturing and sourcing for auto parts.

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Specific component of excise duty applicable to large cars and utility vehicles will be reduced to 15,000 rupees per vehicle from 20,000 rupees earlier.

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The Proposal by the Govt. to set up an expert group to advise on a viable and sustainable system of pricing petroleum products, as this will surely had an impact on the Automobile Industry.

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The announced reduction on the basic customs on bio-diesel is great news for all companies working on environmental saving technologies.

2.) TECHNICAL ANALYSIS Technical analysts track price movements and trading volumes in various securities to identify patterns in the price behavior of particular stocks, mutual funds, commodities, or options in specific market sectors or in the overall financial markets.The goal is to predict probable, often short-term, price changes in the investments that they study, which allows them to choose an appropriate trading strategy. Following is the Technical Analysis of TATA Motors & Maruti Suzuki to understand their pattern and behavior of share prices in the market. Implication of DOW THEORY