J.D. Power and Associates Reports: India Expected to Become the World's Third-Largest Light-Vehicle Market by 2020; However, Profits Not Likely to Match Two Largest Markets, China and the United States

WESTLAKE VILLAGE, Calif., June 13, 2011 /PRNewswire/ -- India surpassed France, the United Kingdom and Italy to become the sixth-largest automotive market in the world in 2010, and it is expected to become one of the three largest automotive markets in the world by 2020, according to a special report titled "India Automotive 2020: The Next Giant from Asia," released by J.D. Power and Associates today.

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More than 2.7 million light vehicles (passenger cars and light-commercial vehicles) were sold in India in 2010, up from just 700,000 light vehicles sold in 2000. Due to increased economic activity and a more consumer-driven culture that has developed during the past 20 years, India—a country with a population of nearly 1.2 billion—is expected to reach 11 million light-vehicle sales by 2020. This would make India the third-largest light-vehicle market in the world, behind China (expected to reach 35 million light-vehicle sales in 2020) and the United States (expected to reach 17.4 million sales in 2020).

"India has quickly become one of the largest and fastest-growing automotive markets in the world," said John Humphrey, senior vice president of global automotive operations at J.D. Power and Associates. "This momentum has been driven by a more open and market-driven economy, an empowered and less risk-averse work force, a more consumer-driven culture and an emphasis on small car production."

Global Small Car Production Hub

In addition to policies favoring general market liberalization and encouraging foreign investment, India's government has pursued policies meant to support development of India's automotive industry. The main thrust of these policies has been to position India as a global hub for small passenger car production. These policies include a reduction on the sales tax of small cars (defined as those less than 4,000 millimeters in length and with an engine displacement of 1.2 liters or less), and providing financial incentives for automakers to build and export vehicles overseas. As a result, many automakers have been shifting their small car production operations to India, or designing vehicles specifically to fit Indian market needs.

In 2010, nearly 80 percent of all new passenger vehicles sold in India were classified as either mini cars or subcompact passenger cars. By comparison, the mini car and subcompact segments accounted for only 24 percent of passenger-vehicle sales in China in 2010, and just 3 percent of passenger-vehicle sales in the United States.

The average transaction price for all new passenger vehicles sold in 2010 in India was about $10,000 (compared with $17,500 in China and $28,000 in the United States), while the best-selling passenger car in India—the Maruti Suzuki Alto—had an average transaction price of about $6,200. While India's emphasis on small vehicles has helped sales to grow quickly, it also means that automaker earnings will depend primarily on small car segments, where profit margins are traditionally thin.

"Should fuel prices continue to climb globally in the future—and as demand for inexpensive and reliable transportation increases in many of the world's developing markets—India could find itself well-positioned to fulfill the needs of the small car segment," said Humphrey. "That said, profit margins are thinner in the small car segment, so automakers are going to need to manage their businesses carefully to optimize profits."

Challenges Remain

While significant progress has been made in building the Indian automotive industry, there are challenges that could impede India from reaching its future potential. Economists and automotive industry executives believe that much still needs to be done to smooth the way and drive the country forward.

In India, government, business and academic officials regularly refer to India's "three deficits" as reasons for caution about India's future growth. These "deficits" are continual international trade deficits; chronic government budget deficits; and an underdeveloped power generation and distribution infrastructure.

While it was India's recurring budget and trade deficits that essentially forced the country to liberalize its economy and industries in the early 1990s—and some improvement has been made in these areas—the country's lagging infrastructure poses the biggest potential obstacle to future growth. To assure the country's continued economic development, the Indian government has earmarked billions for investment in power generation and road/rail networks.

"Much of India's future growth in the automotive sector will depend on successfully creating the infrastructure to support its economy," said Humphrey.

In the automotive space, most senior executives agree that a fourth "deficit" also exists: the lack of a broad-based automotive components and parts production industry, as well as the engineering talent needed to carry the automotive components industry forward.

"Right now, much of the industry still depends on smaller local parts makers to produce components for vehicles," said Humphrey. "For India to build vehicles of high quality, and in large volumes—especially for export—significant improvements to the components industry will need to be made."

About J.D. Power and Associates

Headquartered in Westlake Village, Calif., J.D. Power and Associates is a global marketing information services company providing forecasting, performance improvement, social media and customer satisfaction insights and solutions. The company's quality and satisfaction measurements are based on responses from millions of consumers annually. For more information on car reviews and ratings, car insurance, health insurance, cell phone ratings, and more, please visit JDPower.com. J.D. Power and Associates is a business unit of The McGraw-Hill Companies.

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SOURCE J.D. Power and Associates