A Traffic Jam Of Auto Makers In India

They're pouring in money as others jump into the fray

At the Premier Automobiles Ltd. (PAL) factory on the outskirts of Bombay, there seems to be no end to the problems. The 25-year-old plant, where France's Peugeot has had a joint venture with PAL since last year, is six months behind schedule in producing Peugeot 309s, a $13,500 sedan. Provoked by a militant union leader, the workers are on strike, and production has come to a halt. Some 500 new cars sit unsellable on the factory grounds, all with missing or wrong parts. Jacques Manlay, deputy managing director at the plant, is bewildered by the situation. "Everything is an opportunity to waste time," he says wearily.

JUST TWO. Peugeot is not the only frustrated auto maker in India. In the past two years, nine of the world's major producers, including General Motors, Ford, Fiat, Daewoo Motor, and Mercedes-Benz, have raced into India's newly opened car market. Lured by India's huge potential for growth, they now find themselves on a bumpy road. Fierce competition, labor trouble, a lack of suitable partnerships, high taxes, and infrastructure problems are just some of the hazards.

Despite the difficulties, the current players are putting more money into India even as other foreign makers, led by South Korea's Hyundai Motor Co., are planning to jump into the fray. With so many producers crowding into a market ill-equipped to support them all, the stage is set for a shakeout.

The key to who wins and who loses could be how fast a company can offer models in the small-car segment and how quickly it can achieve fully integrated manufacturing operations, complete with parts suppliers. That seems to favor the bigger, more aggressive players such as Ford Motor Co. and Daewoo Motor Co.

For 35 years, Indians had a choice of just two cars: a clunky 1954 Morris Oxford or a 1951 Fiat, made by Hindustan Motors Ltd. and PAL, respectively. Then, in 1984, a joint venture between the Indian government and Japan's Suzuki Motor Corp. gave the auto market its first taste of competition--an 800cc people's car, the Maruti, the most popular car in India today. But after deregulation in 1991, competition picked up as foreign makers started filling showrooms with sleek models.

Hoping to get off to a fast start, most of the new entrants made their debuts not in the mass market, where 70% of Indian car sales are concentrated, but in the premium segment. They rolled out cars with engines bigger than 1000cc and price tags above $11,500. This has turned out to be too pricey for most Indian consumers--it's 16 to 24 months' average salary, compared with the six months' income that Americans pay for their cars. General Motors Corp.'s Opel Astra recently hit the roads at a price of $20,000.

Partly as a result of that mismatch, sales targets are falling short. Mercedes, with a $63,000 price tag for its E220 model, has an annual production capacity of 20,000 cars but has sold just 600 so far. Fiat expected to sell 15,000 Unos in 1996 but has sold just 380, in part because of labor troubles at joint-venture partner PAL. "The market is not expanding as rapidly as the number of entrants coming in and making cars," says Hormazd Sorabjee, associate editor of Auto India, India's leading auto publication. "It's a tough place to operate."

The foreign auto makers are finding that one of India's biggest attractions--cheap and abundant labor--can be a major problem. Labor relations in India have long been acrimonious. In the past two years, three of India's major carmakers, two of whom have foreign partners, have suffered crippling strikes. The most recent was at a PAL Bombay plant that assembles Fiat Unos. The labor troubles have left managers and workers apathetic, and productivity is dismal. Against a global standard of 40-plus cars per worker per year, India makes an average of five.

The foreign makers are trying to improve relations with workers and unions. Ford, GM, and Daewoo provide rigorous training for their workers and even send some overseas to learn about internationally prevailing workplace practices.

The companies also are trying to fix their manufacturing strategies. Mindful of the problems of maintaining quality in India, most started out by importing car kits to assemble rather than setting up full-fledged manufacturing operations. But that approach has its own hazard, because importing components is expensive. Duties are a prohibitive 110%, and even a single replacement screw can take a month to arrive.

Finding independent local suppliers is tricky. Only a few in India could meet the exacting standards of a Ford or a Daewoo. Beyond that, the successful component makers all have alliances with Suzuki's Maruti Udyog. The competition is so savage, say some analysts, that Maruti has threatened to cut off suppliers from their Maruti 800 contracts if they accept other business. The company denies making such threats.

NEW PLAYERS. But the message is clear: To have a high-quality, cost-competitive parts network, you have to build it yourself. That's why carmakers including Ford have asked their European suppliers to come to India and set up parts-making joint ventures with local companies. GM's component subsidiary, Delphi, already has set up shop in New Delhi to service the Opel with imported and locally made parts.

The competition will only get fiercer. Five other new players will enter the Indian market this year. Hyundai plans to build a $1.1 billion plant, and Mitsubishi, Volkswagen, Toyota, and BMW also are jumping in. Waiting still is Chrysler Corp., which has been looking for a suitable partner for a year. So far, more than $3.5 billion of investment has been planned, and showrooms glitter with new models the likes of which India has never seen.

The survivors will be those that can successfully make an 800cc or smaller mass car, predicts S.G. Shah, adviser to the Association of Indian Automobile Manufacturers. This segment is where Suzuki is king. Priced at $7,000, its Maruti 800 accounts for 65% of all Indian car sales. So far, none of the new entrants has attempted to cross swords with the Maruti, but Ford, Daewoo, and Indian truckmaker Telco all have plans to manufacture small cars in the future.

Is there room for them all? Some experts question whether India's crumbling infrastructure can support the furious pace at which new cars are hitting the roads, a rate of 900 every day. Streets are in such a dismal state that of the 1.5 million miles of roads in India, just 20% are car-worthy. Although the government plans to build an additional 30,000 miles of road, the estimated cost is an astronomical $142 billion.

So far, the answer seems to be that Indians will buy the cars even if the roads aren't ready. For the past three years, growth in car buying has averaged 25% annually. Despite high taxes amounting to almost 50% of a car's retail price and one of the world's most expensive markets for fuel, at 69.4 cents a liter, "the impulse isn't slowing down," says Shah. India now produces 330,000 cars a year.

The market potential is huge. "India will be a major market in the 21st century," says John Parker, president of Ford India, which has an $800 million investment and hopes to use India as an eventual export base. At 3.6 automobiles per 1,000 people, Indian car ownership is among the world's lowest. The U.S. boasts 560 cars per 1,000. At least 2 million Indian households can buy a car with six months' wages. By 2000, provided economic growth is maintained at 6% to 7% a year, demand for passenger cars could reach 2 million units annually, some estimate. Those are the numbers that keep foreign investors plugging away, hopeful their day will come.

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