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India Slowdown Thwarts Carmakers’ Sales Search Beyond U.S

With sales crashing in Europe and slowing in China, carmakers are looking for signs of growth beyond the U.S. market. In India, it’s not looking good.

The holiday season, just under way there, typically accounts for about a quarter of new auto purchases. This year, the market is uncharacteristically moribund as the economy is projected to grow at its slowest pace in a decade. That’s especially tough for Hyundai Motor Co. (005380) and Tata Motors Ltd. (TTMT), the second- and third-biggest carmakers by volume in India.

“Everyone is counting on India to deliver future growth,” said Deepesh Rathore, the New Delhi-based India managing director of IHS Automotive, an industry-research company. “The festive season is a trigger for sales in the second half.”

The run-up to the Hindu celebration of Diwali in mid- November typically sends consumption surging across India, where the proportion of car ownership is less than a third of that in China. This year, the economic slowdown, high borrowing costs and a fuel-price increase may make the holiday season the worst for auto sales since 2008, according to 7 out of 11 analysts surveyed by Bloomberg News.

The Society of Indian Automobile Manufacturers, or SIAM, is considering cutting its forecast for 2012 sales growth for a second time this year, after already paring it back from about 12 percent to 9 percent in July. That’s weak growth for a market that doubled in size from 2008 to 2011, according to Bloomberg Industries data.

Low Ownership

With only 1.3 percent of India’s 1.2 billion people owning a car -- against China’s 4.4 percent and a global average of 14 percent -- the South Asian nation’s untapped potential is a lure for global carmakers. Spurred by 30 percent sales growth in the year ended March 2011, Ford Motor Co. (F) and Maruti Suzuki India Ltd. (MSIL) are among those adding capacity in Asia’s third-biggest auto market.

Ford, which expects India to be among its three biggest markets by 2020, is spending 40 billion rupees ($765 million) on a factory able to produce an additional 240,000 vehicles and 270,000 engines a year by 2014. Maruti, the Indian unit of Japan’s Suzuki Motor Corp. (7269), will open a sixth plant near New Delhi next year to boost annual capacity 17 percent to 1.75 million units.

Now, carmakers are dropping prices and doling out sweeteners as they face the prospect of the worst festival season sales since the collapse of Lehman Brothers Holdings Inc. roiled markets worldwide.

Car Discounts

Hyundai, which is offering a discount of as much as 44,000 rupees on its 365,000-rupee i10 hatchback, said on Oct. 1 that its Indian sales last month declined 14 percent to 30,851 vehicles. Mumbai-based Tata Motors, maker of the world’s cheapest car, the Nano, saw an 18 percent drop in passenger- vehicle sales for September, while Toyota City, Japan-based Toyota Motor Corp. (7203)’s India sales fell 5.4 percent.

Volkswagen AG (VOW) cut prices on some variants of its lowest- priced models, the Polo hatchback and the Vento sedan, on Sept. 4. The Wolfsburg, Germany-based carmaker is offering low interest rates, free insurance, and added features, Arvind Saxena, managing director for passenger cars in India, said in e-mailed comments.

Ford, of Dearborn, Michigan, is offering discounts on its Figo hatchback, including as much as 28,000 rupees on the diesel model.

“We remain confident of the long-term potential of the Indian market,” Ford Managing Director Michael Boneham said in e-mailed comments.

Cutting Forecast

SIAM said Sept. 10 it may cut its full-year domestic car sales forecast as deliveries declined for the first time in the 10 months after Maruti Suzuki shut one of its factories because of a deadly riot. August local deliveries fell 19 percent to 118,142 vehicles. The group had already cut its forecast for car-sales growth to as low as 9 percent in July, from an April estimate of 10 percent to 12 percent growth.

Car demand in India has been hurt by high gasoline prices and borrowing costs in a country where almost 80 percent of auto purchases are funded through loans. The nation’s central bank raised interest rates a record 13 times from March 2010 to October last year to rein in inflation. Headline inflation accelerated to 7.55 percent in August, the fastest in the BRIC group of largest emerging nations that also includes Brazil, Russia and China.

Diesel Prices

A 14 percent increase in diesel prices announced by the government Sept. 13 as part of measures to pare its subsidy bill and trim the budget deficit has further damped automobile purchases. Automakers have added diesel engine capacity and introduced new models as a price gap between gasoline and subsidized diesel spurred demand for the cheaper fuel.

“When there is a such a sharp increase in fuel prices, customers hold off purchases,” said IHS Automotive’s Rathore. “Unfortunately, this increase in diesel prices has come at the wrong time, just before the festive season.”

The Asian Development Bank said yesterday it cut India’s full-year economic growth forecast to 5.6 percent. That would be the slowest expansion in 10 years, according to data compiled by Bloomberg.

The slowdown in India comes as the European debt crisis dragged the region’s auto market to its lowest level in 17 years. Also, Chinese passenger-vehicle sales in August trailed analysts’ estimates for a second month after consumers held off purchases in anticipation of more discounts.

New Alto

Carmakers and 3 of the 11 analysts polled by Bloomberg still said they expect new models and the discounts to help revive demand.

General Motors Co. (GM) will introduce its Shanghai-designed Sail hatchback this month as it looks to newer models to bring back customers. Maruti, India’s biggest carmaker by volume, will introduce a new version of its best-selling Alto hatchback during the festive season.

“Many automakers -- including us -- are introducing new models around the festive season,” said Lowell Paddock, GM’s president for India. “We’re cautiously optimistic that all of the attention this will create will increase showroom traffic.”

Ford, which is offering incentives including insurance payments and free accessories, expects demand to revive before the end of the festival season.

“We are upbeat about the festive period and have lined up various offerings,” said Boneham.

The growth so far this year may signal a postponement of purchases to the festive season, according to Abhishek Gaoshinde, an analyst at Sunidhi Consultancy Services.

“There is a lot of pent-up demand in the market,” said Gaoshinde, in a Sept. 26 telephone interview from Mumbai. “The festive season may see this demand being met, especially with the discounts available.”

Others aren’t so optimistic.

The “general inflationary trend, high fuel prices and interest rates” are damping demand, Hyundai’s India unit, which accounts for about 10 percent of the Seoul-based company’s global shipments, said in e-mailed comments. “Unless any major triggers get activated, market sentiment is not expected to improve very much.”

To contact the reporter on this story: Siddharth Philip in Mumbai at sphilip3@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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