Microeconomic Factors in Automobile Industry in India

Automobile Industry Hailed as the perseverance of industries by Peter Drucker, the founding father of the study of management, in 1946, the travel fabrication had evolved continuously with changing times from craft crossroadion in 1890s to mass production in 1910s to lean production techniques in the 1970s. The Asian countries, in the first place by Japan, China and India, registered a 9% en capacious in production e rattlingplace last year, constituting 35. 9% of the global production. In fact China and India posted positive extend crop all over 2003.This add on mainly catered to meet the learn from ho engageholds where the automobiles constituted the second largest phthisis item next only to housing. Thus the global automobile industriousness dominated by Europe, US, Japan, and of late by China and India, continued to give way a monumental influence on economic development, international trade, orthogonal direct investment and environment-friendly practices. Total Sales Trend of Four-wheelers in India petition Factors 1. Financing Options Auto application observers cite political machine loans as the biggest private road factor for the expansion of the Compact railrailway car segment.At present, almost 85 per penny of all new car gross gross revenue atomic number 18backed by auto pay, comp atomic number 18d to 65 per cent five long time ago. Inte lodge in represent on car loans obligate come down drastically in the past four or five years, which helps prospective buyers, take the plunge. The growth of the CC-segment in thepast fewer years can be mainly credited to factors such as rise in income takes leash to diversify magnitude affordability and simultaneous reduction in bear on pass judgment leading to freeze offEMIs. The drop in interest rates usually helps very few people to probably shifting from the base lay to a princely model.A larger shift happens if people be willing to take long-term loans, the like five y ears instead of the earlier three-year loans. 2. 2. Advertising And merchandise Due to the advertising techniques adopted by all the lyingrs in the CC-Segment the sales break risen drastically. It is all due to because the companies now days atomic number 18 using even aggressive selling techniques for which they are even grapple with the Film celebrities and Cricket stars, like Maruti has contracted Irfan Pathan as thebrand embassador of Zen and for Santro Hyundai has contracted for Shah Rukh Khan.And the companies are even trying to approach to the customser as to their demand fora vehicle at special interest loans, etc. They are using data according to the customers return and earning mental ability for attracting the customers for their vehicles. 3. value of the Car One of the study factors that affect the demand of every commodity in the grocery is the charge of the commodity. As the law of demand as swell states that with an increase in bell the demand of the com modity decreases and guilt versa.Since, in the compact car segment commercialise even in that respect are very less competitors on that point is stiff price competition. give care the price of Zen in 2001 was Rs. 3. 93 lacs which increase to Rs. 4. 01 lacs in 2005, simply remedy the sale of the Maruti brand keeps on increasing it was due to the fellowships reputation with the customers. 4. Income of Consumer / Buyer The income of the consumer or buyer of the car is a very minuteant factor of demand. In recent time we have seen that due to increase in the Income of the general public, there has been a shift from the Lower CC-segment cars to the Upper CC-segmentcars. 2Due to the recent increase in the number of multinationals in India, the income level of the employees have risen drastically and has made CC-segment cars an entry level car for a lot of people. The fair age of a CC-segment car owner has also dropped from 35 years to 31 years in India. 5. IncreaseinAffordabili ty The demand for rider cars is driven mainly by greater affordability, which in turn increases the aspiration level of the customers. Today with gamy amount of disposable income in the hand of Indian youth, who forms major serving of the population, P-marker has larger addressable market. 6. Demographic DriversCars being aspirational products, purchase decisions are influenced by the overall economic environment. Increase in per capita income increases the consumption tendency of the customer. increase in per capita income and rising aspirations and changing lifestyle is leading to change magnitude gustatory sensation for cars over two-wheelers, which is also having a positive rub off on car demand. 7. Availability of Easy Financing Options A majority of PV purchases are financed by means of financial institutions. Over the past4-5 years car patience has been benefited through significant increase in affordability due to the decrease in EMIs.Car finance rates dropped from 1 7% in 2000-01 to 11%in 2005-06. However it has increased and averaged at 13. 75% in 2006-07. The current hardening of interest rates is expected to affect demand by reducing affordability. 8. New Offerings Car sales increase when a new model hits the market. Due to escalation in competition in Indian car market, frequency of new model launches has increased. In the past unmatchable year only the Indian car market has seen m each launches namely SX4,Swift Diesel, Zen Estill, Spark, Logan, etc. 9. ExportsThe share of merchandises from interior(prenominal) production is currently at 12-13%, which is much lower than current exporting hubs. Currently, Indias share of global passenger cars export volume stands at less than 1%. But India is fast emerging as a manufacturing hub for leading global car makers, and several composers have already securelyed upplans for setting up manufacturing bases in India, which will also be employ for exports. 3 Supply Factors 1. PresenceacrossSegmen ts Manufacturers with presence across mingled product segments can ensure naughtyervolume and better capacity utilization by using the common manufacturing capacity.Typically a customer upgrades from cardinal segment to higher segment and the presence across respective(a) segments ensures that the union retains its existing customers. 2. Efficient Operations Competition in PV segment is very intense and this requires the existing players to initiate steps to reduce their terms of production. perfumeual and successful operation methods like platform commonality, reduction in marketer base and workforce rationalization can help a connection immensely. 3. WideDealer Network and Availabilityof FinanceA wide dealer entanglement helps the follow serve customers over wide geographical area. For e. g. Maruti has used its useable wide service network as point of difference over competitors. The companies are tying up with the financial institutions having rural presence to pull up stakes additional financing options to customers in such areas. 4. Accessto Latest Technologies Indian PV segment is highly competitive with as many as 14 players operating in it and much than 80 models on the offering. But still any new model launch meets with increase in sales volume for the company.Moreover in a time when a substantial piece of Indian customer is looking to upgrade in higher segment, companies with in style(p) technologies and latest models will catch more attentions 5. Price of the Car Price of the car is one of the major factors that affect the supply as intumesce as the demand of a car. If the price of the car is high in the market, the manufacturer or the supplierwill want to supply more wholes in the market so he can earn more loots. In the automotive industry where the market type is oligopoly, if one company drops its price for the car, there is a huge impact on the sales of the some another(prenominal) cars as well as the same car.In the market the price of one car is inter-related to the price of the othercars in the same segment. The crush solution is that market equilibrium should be achieved so that the amount of the bill demanded should be equal to the amount of the criterion supplied to achieve maximum profits. A Market Equilibrium is achieved at the point of intersection of the demand linage and the supply line. The point is the equilibrium point where the amount of money demanded is equal to the quantity supplied. 6. Factors ofProduction in that respect are some factors of production which influence the supply of a car likeCost of Raw Material Labor Cost Machinery infix Cost. These factors influence the supply of a car largely. If the embody of the raw hooey (Steel, Spare Parts, Rubber) increases there will be an increase in the cost ofproduction leading to decrease in profit margins. Costs like labor cost, machinery and input be also influence the supply with the increase or decrease in these costs. 7. 7. Government Policies and revenuees If there is a change in the government policies regarding the increase in the road appraise aerated or the tax which is to be paid per whole sold, the supply of a car will fluctuate with the nature of the change.Recently the government has reduced the custom tariff on inputs and raw material from 20% to 15% which has increased the supply. Conclusion Market economies are assumed to have many buyers and sellers, high competition and many substitutes. Monopolies characterize industries in which the supplierdetermines prices and high barriers hamper any competitors from entering the market. Demand and supply refer to the relationship price has with the quantity consumers demand and the quantity supplied by producers. As price increases, quantity demanded decreases and quantity supplied increases.On the other hand, elasticity tells us how much quantity demanded or supplied changes when there is a change in any of the factor. The more the quantity changes, the more elastic the good or service. By studying various demand and supply factors affectingthe automobile industry we can shut that an upturn or downturn in this sector is due to an aggregate effect ofmultiple factors. These together govern the economies of automobile sector. Porters fin Forces Analysis of Indian Automobile Sector Industry rival negociate Power of CustomersBargaining Power of Suppliers holy terror of New Entrants menace of Substitutes Industry Rivalry Bargaining Power of Customers Bargaining Power of Suppliers Threat of New Entrants Threat of Substitutes 1. Industry Rivalry * Industry Concentration The Concentration Ratio (CR) indicates the share of market share held by a company. A high tautness ratio indicates that a high submerging of market share is held by the largest firms the industry is concentrated. With only a few firms holding a large market share, the market is less competitive (closer to a monopoly).A low concentration ratio indicate s that the industry is characterized by many rivals, none of which has a significant market share. These fragmented markets are said to be competitive. If rivalry among firms in an industry is low, the industry is considered to be disciplined * High Fixed costs When total costs are mostly fixed costs, the firm essential produce capacity to attain the lowest unit costs. Since the firm must sell this large quantity of product, high levels of production lead to a fight for market share and results in increased rivalry.The industry is typically capital intensive and thus involves high fixed costs * diminish market growth In growing market, firms can improve their economies. though the market growth has been impressive in the last few years (about 8 to 15%), it takes a beat in even comminuted economic disturbances as it involves a luxury good. Aggressive pricing is essential to sustain growth in such situations * Diversity of rivals Industry becomes equivocal as the diversification increases. In this case the diversity of rivals is moderate as most offer products which are close to standard versions and the competitors are also mostly similar in strength Highly competitive industry The presence of many players of about the same size teeny-weeny note between competitors, and a very mature industry with very little growth were the features of a highly competitive industry. Higher the competition in the industry lower would be the profit margin. To remain ahead in competition, auto-makers were tempted to offer value added services to the customers incurring more costs 2. Threat of New Entrants These are the characteristics that inhibit the entrance of new rivals into the market and in turn protect the profits of the existing firms.Based on the present profit levels in the market, one can expect the entrance of new firms into the market or not. The entrance is however also affected by the start-up costs * Economies of scale The Minimum Efficient Scale (MES) is the point at which unit costs are minimized. The greater the difference between the MES and the entry unit cost, greater is the barrier. Economies of scale are becoming increasingly significanceant as competition is driving the profit margins to lower levels. Also being a capital intensive industry economies of scale have upshotant progeny * Government policies Automobile Industry was delicensed in July 1991 with the announcement of the New industrial Policy * The passenger car industry was delicensed in 1993. No industrial licence is required for setting up of any unit for manufacture of automobiles except in some special cases * The norms for Foreign Investment and import of technology have been progressively liberalized over the years for manufacture of vehicles including passenger cars in order to make this sector globally competitive * At present carbon% Foreign Direct Investment (FDI) is permissible low automatic route in this sector including passenger car segment.The im port of technology/technological upgradation on the royalty payment of 5% without any duration limit and lump sum payment of USD 2 trillion is allowed under automatic route in this sector * The automotive industry comprising of the automobile and the auto component sectors has made rapid strides since delicensing and opening up of the sector to FDI in 1991 * The industry had an investment of about Rs. 50,000 crore in 2002-03 which has gone up to Rs. 80,000 crore by the year 2007.The automotive industry has already bring home the bacon a turnover of Rs. 1,65,000 crore (34 billion USD) * The industry provides direct and indirect use of goods and services to 1. 31 crore people. The character of the automotive industry to GDP has risen from 2. 77% in 1992-93 to 5% in 2006-07. The industry is making a contribution of 17% to the kitty of indirect taxes of the Government With all the policies regarding the FDI and tariff barriers as mentioned above, it has become easier for the forei gn players to enter the Indian automobile industry. 3.Threat of Substitutes * The replacement market is characterized by the presence of several small-scale suppliers who score over the organise players in terms of excise duty exemptions and lower overheads. * A products price elasticity is affected by the presence of substitutes as its demand is affected by the change in the substitutes prices * The cost of the automobiles along with their operating costs was driving customers to look for secondary transportation options * The new technologies available also affect the demand of the product E. g. In case of Marutis products, the threat of substitutes is high. The competition is intense as several players have products in the categories given by Maruti. However, in the 800cc prevail it is the market leader and the threat of substitute products is low. Price performance resemblance favors heavily towards Maruti in most product categories. Also the high accessibility and quality of services offered by Maruti gives the customer a better trade-off 4. Bargaining Power of Suppliers * Suppliers can influence the industry by deciding on the price at which the raw materials can be sold.This is make in order to capture profits from the market. * Steel is a major input in this industry and so firebrand prices have a sharp and immediate impact on the product price * The industry being capital intensive switching costs of suppliers is high, other than steel as raw material which is highly price sensitive and the firm may easily move towards a supplier with lower cost 5. Bargaining Power of Buyers * It specifies the impact of customers on the product * When buyer major power is strong, the buyer is the one who sets the price in the market.Here there is purchases of large volumes * There is prevalence of alternative options * Price sensitive customers were some of the factors that determined the finis of influence of the buyers in this industry E. g. In the case o f Maruti, the sales volumes have shown increasing trend over past so many years. The customers are more or less concentrated in metros or other tier two cities. The industry is also concentrated in these regions mostly. close to of them are have good amount of knowledge about the product.Except the 800cc range in other categories brand loyalty is only moderate. Also it is problematic to measure since repurchases are rare. Product differentiation is high as there are many categories in the passenger vehicle segment. Buyers get incentives in the form of cost discounts and better after sales services * The major focus of Indian Component suppliers is Quality as suggested by one of the Japanese Quality focus firm. The Industry association ACMA reports that over clxx of its members have already get ISO-9000 certification and 23 have received QS9000 certification.There are examples of Indian suppliers becoming single source global suppliers for leading OEMS (GM and Ford), and also bec oming global leaders with Sundaram Clayton receiving the Deming award but there are few drawbacks as shown by A. T, Kearney survey which found that reproach rates in India are in the range of carbon0-2000 ppm against Japanese average of 100-200 ppm * The rising gasoline price is bound to influence the buyers Taxation India has a well-developed tax structure. The power to levy taxes and duties is distributed among the three tiers of Government, in accordance with the pabulum of the Indian Constitution.The main taxes/duties that the Union Government is sceptred to levy are- Income Tax (except tax on agricultural income, which the State Governments can levy), customs duty duties, Central scratch up and Sales Tax and Service Tax. The principal taxes levied by the State Governments are- Sales Tax (tax on intra-State sale of goods), imprint traffic (duty on transfer of property), State Excise (duty on manufacture of alcohol), Land Revenue (levy on land used for agricultural/non-ag ricultural purposes), tariff on Entertainment and Tax on Professions & Callings.The Local Bodies are empowered to levy tax on properties (buildings, etc. ), Octroi (tax on entry of goods for use/consumption within areas of the Local Bodies), Tax on Markets and Tax/ user Charges for utilities. Excise traffic Central Excise duty is an indirect tax levied on those automobiles which are manufactured in India and are meant for home consumption. The taxable event is manufacture and the liability of central excise duty arises as briefly as the automobiles are manufactured.It is a tax on manufacturing, which is paid by a manufacturer, who passes its incidence on to the customers. Types of Excise Duties Basic Excise Duty This is the duty leviable under First Schedule to the Central Excise responsibility Act, 1985 at the rates mentioned in the said Schedule. Special Excise Duty This is the duty leviable under Second Schedule to the Central Excise Tariff Act, 1985 at the rates mentioned in the said Schedule. At present this is leviable on very few items.Basic Central VAT (CENVAT) or Excise Tax Structure for Automobiles Year Commercialfomites MUVs Cars 2 Wheelers 3 Wheelers Unit ? 75 CC 75CC 2001-02 16 32 32 16 16 16 % 2002-03 16 32 32 16 16 16 % 2003-04 16 24+1* 24+1* 16+1* 16+1* 16 % 2004-05 16 24+1* 24+1* 16+1* 16+1* 16 % 2005-06 16 24+1* 24+1* 16+1* 16+1* 16 % 2006-07 16 24+1* 24/16**+1* 16+1* 16+1* 16 % 2007-08? 16 24+1* 24/16**+1* 16+1* 16+1* 16 % Source inn of Indian Automotive Manufacturing (SIAM) Based on Government of India Notifications,?Additional higher & Secondary Education Cess of 1%,* subject area Calamity Contingent Duty (NCCD) of 1 %,**16% on cars (up to 4000mm in length &1200cc for petrol & up to 4000mm in length & 1500cc for diesel) and 24% for rest National Calamity Contingent Duty (NCCD) Normally known as NCCD. This duty is levied as per section 136 of the Finance Act, 2001, as a swipe on specified goods. Excise Duties and Cesses Levia ble under Miscellaneous ActOn certain specified goods, in addition to the aforesaid duties, prescribed rate of excise duty and cess is also leviable.EducationCesson excisable goods is levied in addition to any other duties of excise chargeable on such goods, under the Central Excise Act, 1944 or any other law for the time being in force. tradition Duty Customs Duty (Import duty and Export tax) is a type of indirect tax levied on goods imported into India as well as on goods exported from India. Taxable event is import into or export from India. In India, the basic law for levy and collection of customs duty is Customs Act 1962.It provides for levy and collection of duty on imports and exports, import/export procedures, prohibitions on importation and exportation of goods, penalties, offences, etc. Basic Customs Tax Structure for Automobiles Year CVs1 MUVs2 Cars Two Wheelers Three Wheelers Unit 2001-02 35 one hundred five/60/35 cv/60/35 one hundred five/60/35 105/60/35 % 2002-03 3 0 105/60/35 105/60/35 105/60/35 105/60/35 % 2003-04 25 105/60/35 105/60/35 105/60/35 105/60/35 % 2004-05 20 105/60/35 105/60/35 105/60/35 105/60/35 % 2005-06 15 100/60/15 100/60/15 100/60/15 100/60/15 % 2006-07 12. 100/60/12. 5 100/60/12. 5 100/60/12. 5 100/60/12. 5 % 2007-08 10 100/60/10 100/60/10 100/60/10 100/60/10 % Source Society of Indian Automotive Manufacturing (SIAM) Based on Government of India Notifications, *For Used Vehicle/New CBU/CKD & Components respectively,1CVs = Commercial Vehicles2MUVs = Multi-Utility Vehicles Export duties are levied occasionally to mop up excess profitability in international prices of goods in respect of which municipal prices may be low at the given time. But the span of import duties is quite wide.